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Australia, NZ dollars hold gains, weather China data squall

[SYDNEY] The Australian and New Zealand dollars were consolidating gains on Monday after bouncing in the wake of soft US inflation numbers, while suffering a slight setback from disappointing data out on China.

The Australian dollar was 0.2 per cent firmer at US$0.7905, having rallied from a trough of US$0.7839 on Friday when a surprisingly low reading on US inflation was taken as lessening the chance of another rate hike there.

"There are clear signs of broader deflationary pressures too ranging from electronics, to education, to medical services," said ANZ economist Felicity Emmett.

"And this is where it starts to get complicated for the Fed - and central banks in general - as it is becoming clear that secular forces are playing a bigger role in the inflation generating process."

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The head of the Reserve Bank of Australia (RBA) last week made it clear there was scant chance of a hike in domestic rates until next year as inflation is only very gradually returning to target.

The futures market has priced out virtually any change in policy by December and is not fully priced for a rise to 1.75 per cent until November next year.

The Aussie took a glancing blow when a raft of Chinese economic data missed forecasts. China is Australia's single biggest export market, particularly for iron ore.

The ore slipped in price for a second session on Monday when the Shanghai futures exchange increased transaction fees to fight speculative trading.

The weaker greenback, combined with strong New Zealand retail data, gave the Kiwi a tailwind as it recovered from the previous week's one-month lows.

The kiwi burst up to US$0.7331 when a morning data release showed retail sales beating expectations on a flurry of sports tourism spending in the second quarter.

The kiwi had been as low as US$0.7253 last week when a top official at New Zealand's central bank said they were becoming more uncomfortable with the strength of the currency.

The bounce reinforced the resilience of chart support at US$0.7250.

"With US sentiment weakening again following the softer-than-expected CPI result, that support level is likely to be too hard a barrier to break in the near-term," said Philip Borkin, senior economist at ANZ Bank.

New Zealand government bonds eased, sending yields 4.5 basis points higher at the long end of the curve.

Australian government bond futures also dipped, with the three-year bond contract off three ticks at 98.050. The 10-year contract lost two ticks to 97.3950.