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Australia, New Zealand dollars rally on rate view and China relief

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The Australian dollar touched a four-week high on Friday as the market scaled back bets on a near-term cut in local interest rates, while Chinese data showed some resilience in September activity even as third-quarter growth slowed.

[SYDNEY] The Australian dollar touched a four-week high on Friday as the market scaled back bets on a near-term cut in local interest rates, while Chinese data showed some resilience in September activity even as third-quarter growth slowed.

The Aussie dollar was firm at US$0.6835 after jumping jumped almost 1 per cent on Thursday alone as a break of major resistance at US$0.6810 sparked a wave of short-covering.

The New Zealand dollar followed to its highest in five weeks at US$0.6376, climbing 0.9 per cent overnight.

The rally began when Australian jobs data showed an unexpected dip in unemployment in September, which dimmed speculation the Reserve Bank of Australia (RBA) would cut interest rates again soon.

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It got a further lift when RBA Governor Philip Lowe told a conference in Washington that lower rates were working to improve the economy and a move to negative rates was "extraordinarily unlikely".

The futures market responded by paring back the probability of a November rate cut to just 14 per cent, compared with 34 per cent a week ago. The chance of an easing in December dropped to 52 per cent, after rising above 80 per cent last week.

The central bank has already cut rates three times this year to a record low of 0.75 per cent and is fast running out of room to ease more.

"The September labour report is likely to be good enough for the RBA to hold back and not follow through with another interest rate cut in November," said Peter Dragicevich, a market strategist at Suncorp.

"But given the still sluggish domestic growth backdrop, external risks, trend of lower global interest rates and excess capacity that remains in the labour market, it still looks like a matter of when, not if, the RBA provides more support."

As a result, the market is almost fully priced for an easing to 0.5 per cent by March next year.

For now, the diminished chance of near-term easing weighed on bond futures. The three-year bond contract eased another 1.5 ticks to 99.250, the lowest in more than a month and some way from the recent all-time top of 99.460.

The 10-year contract slipped 1 tick to 98.8850, away from its recent peak of 99.1550.

The Aussie was unfazed by a mixed bag of Chinese data that showed economic growth slowed to 6.0 per cent in the third quarter, just missing forecasts of 6.1 per cent.

Yet industrial output beat estimates with an increase of 5.8 per cent in September, while retail sales growth picked up to an annual pace of 7.8 per cent, offering hints that stimulus was supporting activity to some extent.

"The numbers could have been worse. If anything there was some fear it might drop below 6 per cent but that didn't happen," said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore.

"The industrial production numbers highlight that there is a bit of a glimmer of hope on the manufacturing side and some hope that trade progress will help further," Mr Kotecha added.

REUTERS