Australia, New Zealand dollars find a crumb of comfort in China data

[SYDNEY] The Australian and New Zealand dollars got a much-needed lift on Friday after a survey of Chinese manufacturing surprised on the high side for once, a crumb of comfort amid mounting worries over the Asian giant.

The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) rose to 49.9 in February, from 48.3 in January, handily topping expectations.

It was enough to hoist the Aussie dollar up to $0.7105, from a low of US$0.7090, though it was still down 0.4 per cent on the week. The failure at the week's top of US$0.7200 has turned that level into major resistance, while support comes in at US$0.7070 and US$0.7054.

The kiwi dollar edged up to US$0.6814, from a trough of US$0.6797. The week's high of US$0.6902 is now resistance, while support lies around US$0.6758.

The US currency got a lift overnight when data showed US economic growth beat forecasts in the December quarter, supported by strength in household consumption.

In contrast, Australian households have been reining in spending amid sluggish wage growth and sliding home prices.

Figures from property consultant CoreLogic out on Friday showed home prices nationally fell another 0.7 per cent in February, though that was a small improvement from January's 1 per cent drop.

The Reserve Bank of Australia (RBA) recently warned that a further significant fall in prices could undermine household wealth and spending.

The weakness in consumption is one reason analysts suspect figures for gross domestic product (GDP) out next week will annual growth slowed to around 2.6 per cent last quarter.

"We expect home price falls to double to 14 per cent, peak to trough, making a negative household wealth effect on consumption likely," said UBS economist George Tharenou.

"We expect GDP to clearly slow to a below-trend 2.3 per cent in 2019, seeing unemployment rise and the RBA cut in November, with risk of earlier easing."

Investors have already moved to price in the risk of a cut in interest rates this year, with futures implying around an 80 per cent probability of a quarter point easing in the 1.5 per cent cash rate.

That in turn has pushed down Australian bond yields and fattened the premium offered by US debt.

Yields on Australian 10-year bonds are now 56 basis points below those on US paper, compared with 36 basis points at the start of the year.

In New Zealand, consumption has held up much better, though data out Friday showed the country's terms of trade fell a surprisingly sharp 3.0 per cent last quarter.

Australian government bond futures dipped in line with Treasuries. The three-year bond contract eased 3.5 ticks to 98.330, while the 10-year contract fell 5 ticks to 97.8550.

New Zealand government bonds also slipped, pushing yields up 1 to 2 basis points.

REUTERS