Australia dollar weathers China blow, gains on yen

The Australian dollar fell after disappointing data on Chinese manufacturing on Thursday, though losses were limited by speculative demand to buy the Aussie for yen.

The Aussie AUD=D4 initially fell a third of a U.S. cent to as low as $0.8880 when China reported its index of manufacturing (PMI) had dipped to 51.0 in December, when the market had been looking for 51.2.

Yet it slowly clawed back to $0.8915 as funds concentrated on selling yen against a range of currencies. The Aussie edged up to 93.86 yen AUDJPY=R on Thursday, having been as low as 91.13 last month.

The New Zealand dollar fared even better, rising to 86.54 yen NZDJPY=R and back toward six-year peaks hit earlier in the week. The kiwi was a shade firmer on the U.S. dollar at $0.8222

NZD= with trading curtailed by a holiday in New Zealand.

The yen has been under sustained pressure in part on speculation the Bank of Japan will add to its already massive asset buying program to offset the impact of an increase in the sales tax due to take effect in April.

The Aussie also drew some comfort from domestic data showing the biggest rise in Australian home prices in four years, further evidence that low interest rates are working through the economy. News Search ID:nL3N0KC02L

This is one reason the market has scaled back expectations for another cut in rates from the Reserve Bank of Australia (RBA). Interbank futures 0#YIB: imply no more than a one-in-five probability of a further easing.

"Rising house prices are positive for wealth measures and household spending growth," noted Gareth Aird, an economist at CBA. "With strong population growth expected to continue, demand for housing will remain strong and a pick-up in dwelling construction is forthcoming."

"We view the RBA as reluctant rate cutters and think that the current cash rate is the low point for the cycle."

The data added to pressure on Australian bond futures already hurt by rising U.S. bond yields. The three-year bond contract YTTc1 slid 8 ticks to 96.920, while the 10-year contract retreated 9 ticks to 95.720.

(Editing by Kim Coghill)

Keywords: MARKETS AUSTRALIA/FOREX