The Australian dollar reversed losses on Thursday after data showed China's factory sector turned in its best performance in five months.
The HSBC Flash China Manufacturing Purchasing Managers' Index (PMI) edged up to 49.7 in May, a five-month high.
There has been a lot of concern surrounding Chinese growth, with recent data pointing to a slowdown in the world's second largest economy.
As a result of the positive news from China, the Australian dollar, which had been down for the day, lifted from around US92.20¢ to be trading at US92.72¢ in late afternoon trade.
The improvement in the PMI was broad-based with both new orders and new export orders back in expansionary territory, HSBC China chief economist Hongbin Qu said.
"Some tentative signs of stabilisation are emerging, partly as a result of the recent mini-stimulus measures and lower borrowing costs," Mr Hongbin said.
"But downside risks to growth remain, particularly as the property market continues to cool. We think more policy easing is needed to put a floor under growth in the coming months."
The local currency has held relatively strong despite a plunge in the price of one of Australia's most valuable exports, iron ore.
Iron ore has slumped more than 25 per cent in 2014 and is trading under $US100 per tonne for the first time since September 2012, at $US98.50 per tonne.
"Commodity prices continue to drop as the RBA reminds us, there is a disconnect between the drop in the terms of trade and the currency, but the risk environment that we are in means you're probably going to be in a situation where that disconnect continues for some time," Westpac chief currency strategist Robert Rennie said.
An excess of global liquidity in financial markets is creating a cushion for the Australian dollar, Mr Rennie said whilst forecasting an end of year price of US90¢.
"There has been a lot of press around the idea that the ECB (European Central Bank) is about to embark on another wave of QE (quantitative easing), and similarly the BoJ (Bank of Japan), even if it is happy with the monetary policy settings that is has, its balance sheet is set to expand aggressively as well," Mr Rennie said.
Soft Chinese growth, lower commodities prices and continued recovery from the US economy would likely put downward pressure on the Australian dollar towards the end of the year.
However, Deutsche Bank chief economist Adam Boyton said he did not expect the short-term moves in iron ore to hit the Australian dollar.
"As we have argued in [the past] the Australian dollar typically only responds over the short-term to a move in iron ore prices if it drives a big shift in cash rate expectations," Mr Boyton said.
"Given the [Reserve] Bank's firm 'on-hold' stance that appears unlikely for now. More important in our view for fresh lows in the Australia dollar will be a shift in US rates. Given current trends in the US bond market that may be some way off," he said.
Financial markets are now pricing in a 17 per cent chance of a rate hike in the next 12 months, down from nearly 50 per cent early last week before the Federal Budget was released and around 80 per cent about a month ago.
The lack of response from the local currency to the falls in iron ore pointed to the view that the risk of a rate cut over the next 12-18 months is now around the same as a rate hike," Mr Boyton said.