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The Australian Dollar's rebound through August and September could be at risk of fading as a new month beckons and a pullback in iron ore prices threatens to deepen.

According to a new analysis from investment bank Crédit Agricole, the Australian Dollar's recent advance has a lot to do with an uptrend in iron ore prices, but renewed jitters surrounding China's property sector, seasonal quotas on steel production and Golden Week holidays threaten a deeper pullback.

"Last week, iron prices reached a six-month high, despite China’s residential property sector remaining in the doldrums," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole. "The resulting boost in the iron ore price has been an underwriting support for the AUD."

Data shows China's property sector accounts for about 20% of China’s steel, the manufacturing of which relies heavily on Australian iron ore. The rise in iron prices has correlated with Australian Dollar strength, particularly on the crosses, such as against the Pound and Euro:

Above: Iron ore prices (top) have been rising but the ascent appears to have stopped. The lower panel shows the AUD vs. GBP exchange rate.

According to Crédit Agricole, recent demand for steel also has the rapid expansion of China’s green sector to thank, as well as its growing electric vehicle industry. Speculation amongst investors over the prospect of stimulus measures aimed at boosting the flagging economy has also underpinned the iron ore rally.

But iron ore prices have come off their peaks after concerns over the health of China's residential property sector emerged again this week, centred around China Evergrande Group's missing onshore debt payments.

"We are also running into the season where steel mills will have to start lowering their production levels so as not to exceed quotas set earlier in the year to limit pollution," explains Marinov. "There remain questions over whether these quotas will be strictly enforced given the struggling economy."

He says investors' nerves are heightened over the course authorities will take.

"Next week is also the Golden Week holiday period, which will see a significant drop in steel production," says Marinov. "The AUD will continue carefully watching iron ore prices in the coming days."

Currency analysts at Westpac are also wary of AUD downside linked to softer iron ore prices, and metal prices more generally.

"Iron ore fundamentals point lower... with steel and steel product inventory at mills, dealers and warehouses rising/ above average levels when they would normally be falling," says a note from the currency strategy team at Westpac.

A Mysteel poll of 90 downstream construction companies revealed that less than half were replenishing steel inventories.

Bloomberg also notes that Chinese imports of cheaper Indian iron ore have doubled so far this year due to “opportunistic buying” from Chinese steel mills to cut costs and the removal of a hefty Indian export tax.

Westpac targets a down-move in AUD/USD to 0.62.