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The Australian Dollar can appreciate further says one of Australia's largest banks.

Currency analysts at Westpac say the Australian Dollar "can continue its strong run so far in 2023... lifted by the prospect of more RBA interest rate hikes and an improving growth outlook in top trade partner China."

The Australian Dollar is 2023's top-performing currency, aided by a strong domestic economy, an improved global growth outlook and the prospect of further Reserve Bank of Australia interest rate hikes owing to stubbornly high inflation.

But it is the surprise decision by Chinese authorities to abandon the zero-Covid policy that has potentially proven the most decisive factor in putting the Aussie Dollar onto the front foot.

"Beijing’s retreat from its Covid-zero policy is being viewed by the market as broadly positive for Asia’s largest economy, and an improving outlook for China’s infrastructure and housing sectors has helped to boost the price of key Australian commodity exports such as iron ore and copper," says Sean Callow, senior currency market strategist at Westpac.

"It's improved the prospects for Australian commodity prices and investor perceptions of the Aussie," he adds.

The reopening of China is tipped to boost support for Australian industrial commodities, however, the return of high-value Chinese tourists and students is also expected to provide a sizeable boost to Australia's services exports.

Westpac says the performance of the Australian Dollar thus far in 2023, and recent fundamental developments, leaves its year-end forecasts looking too conservative.

A year-end forecast for AUD/USD at 0.74 is likely to be upgraded accordingly, says Callow.

Westpac economists say the RBA is likely to raise interest rates by 25 basis points on three further occasions, suggesting the impetus for Australian interest rates is higher.

This is anticipated to provide support to the Australian Dollar, particularly against central banks that are about to end their hiking cycles.

Of note, the Bank of Canada has already announced a pause, the Federal Reserve is expected to end its hiking cycle and expectations are that the Bank of England is also nearing the end.

"The fact that inflation was even higher than expected in the December quarter does seem to cement the case for further rate hikes, rather than a pause in the near term," says Callow.

"The Aussie is still benefiting from that change in perception on where yields are going," he adds.