The Australian and New Zealand dollars took a breather on Friday after a week of choppy trading, with a disappointing study on Chinese manufacturing providing another reason for caution.
China's official purchasing managers' index (PMI) unexpectedly fell to a deflationary 49.5 in May, a blow to hopes that the Asian giant is finally gaining strength.
Much now depends on the key measure of US inflation, expected later in the session, which could be the deciding factor for a rate cut by the Fed in September.
The Australian dollar settled at 0.6633 US dollars, after rising 0.3% overnight, with little change during the week after it oscillated between support at 0.6591 US dollars and resistance at 0.6680 US dollars.
The New Zealand dollar rose slightly to US$0.6121, after rebounding from a low of US$0.6090 in the previous session. Resistance is located at the 10-week high at $0.6170, while support is located at $0.6084.
The rise in US Treasuries supported risk appetite and provided some much-needed relief to local bonds, which pushed yields to their highest levels in four weeks.
Three-year bond futures rebounded to 95,950 from a low of 95,870, putting them down 7 points on the week.
Expectations for Australian returns were also mixed this week as markets turned very tight after a sudden rise in inflation, before calming after weak US data.
Futures once again point to the possibility of the Reserve Bank of Australia (RBA) raising interest rates by 12%, up from 27% on Thursday. The first easing is now seen as likely from May next year, compared to September the day before.
Many analysts are more pessimistic and still expect a move before Christmas.
Lucy Ellis, chief economist at Westpac, said: “It will take some time before enough evidence is gathered to convince the board that disinflation is on track.”
“But if things develop as we expect, a far-sighted central bank will want to start reducing policy restrictions around November.”
Data due next week are expected to support the case for cuts as economic growth has almost stopped in the first quarter.
Markets have also delayed the expected timing of a rate cut by the Reserve Bank of New Zealand (RBNZ). A quarter-point cut is seen as only a 37% chance for October, but is fully priced in for November.
The New Zealand central bank itself assumes a stable policy until mid-2025.
