Australia & NZ dlrs dip modestly on disappointing China factory activity

* China HSBC PMI falls to 48.1 in March from 48.5 in Feb

* Aussie resilience underpinned by RBA neutral bias

* Data shows specs trim Aussie short positions

By Cecile Lefort and Naomi Tajitsu

SYDNEY/WELLINGTON, March 24 (Reuters) - The Australian and New Zealand dollars edged lower on Monday after a disappointing Chinese manufacturing report added to worries of a marked slowdown in the world's second-largest economy.

The Aussie AUD=D4 slipped to $0.9070, from $0.9084 in early trade, after a private survey showed activity in China's factories shrank for a fifth straight month in March as output and new orders both weakened. News Search ID:nS9E8L102K

The Australian dollar is sensitive to news out of China, its key export market. The market often uses the Aussie as a liquid proxy for exposure to China's growth cycle.

Still, the fall was limited as recent indicators had already been pointing to a soft trend in the Asian power house.

"It's more of the same story rather than a brand new piece of news that the market is getting worried about," said Michael Turner, a strategist at RBC Capital Markets.

He said the Aussie's resilience to negative news in China was because of the Reserve Bank of Australia's (RBA) recent shift to a neutral stance from an easing bias.

"You just lose that impetus for it to move lower when you don't have the RBA being a lingering prospect."

The RBA kept rates on hold earlier this month at a record low of 2.5 percent this year, saying the most prudent course was likely a period of stability.

Markets largely expect rates to be steady this year with financial markets giving around 50-50 chance of a rate hike in a 12-month horizon. CSSY

This partly explains why the Aussie was still within sight of highs of $0.9138 touched last week with chart support seen around $0.9040. Resistance was found at $0.9100 which has proved a tough level to sustain.

Also helping the Aussie is currency speculators trimming short positions. Data from the Commodity Futures Trading Commission showed a drop to around 24,500 in net short Aussie contracts last week, from 40,000 in the period before.

News Search ID:nL2N0MI1KP

The New Zealand dollar NZD=D4 dipped to $0.8523, from $0.8535 in early trade, pulling further away from an 11-month high of $0.8641 hit last week.

It eased against a broadly supported Aussie AUDNZD=R , which edged up to a session high around NZ$1.0660, while it traded at 79.89 versus a currency basket =NZD , off a post-float high of 80.43 touched last week.

The kiwi remains strongly supported on expectations that the country's central bank will continue to raise interest rates as the economy strengthens.

The Reserve Bank of New Zealand embarked on a tightening cycle earlier this month, and markets have nearly fully priced in another 25-basis-point rate rise to 3.0 percent next month, with roughly four more hikes priced in for the coming year.

The main event for New Zealand markets will be official trade data due on Thursday, which is expected to show a growing trade surplus due to booming dairy exports.

A strong reading could boost the kiwi, particularly against the Aussie, which has been struggling due to easing commodity prices, and signs of slowing Chinese growth.

"We maintain our view of AUD depreciation," analysts at Barclays capital said in a note, adding that it continued to favour a short Aussie/kiwi position.

"We would rather trade AUD lower versus the NZD. New Zealand's terms of trade being at 40-year highs, strong economic growth momentum, a bubbling housing market and an aggressive RBNZ tightening cycle are likely to support the NZD."

Other analysts see further kiwi demand could take the Aussie back down to a seven-week low around NZ$1.0525 hit earlier this month.

New Zealand government bonds 0#NZTSY= were unchanged, keeping the yield on 2023 bonds at 4.645 percent NZ10YT=RR , not far from a two-month high of 4.670 percent hit last week.

Australian government bond futures were steady with the three-year bond contract YTTc1 at 96.930 and the 10-year contract YTCc1 at 95.830.

Two-year cash bonds retreated to 2.86 percent, having matched a six-month peak of 2.90 percent last week as markets trimmed chances of any further rate cut in Australia.

A sustained break above 2.90 percent would target the July peak of 3.0 percent.

(Editing by Shri Navaratnam)

((Cecile.Lefort@thomsonreuters.com)(+61 2 9373-1234)(Reuters Messaging: cecile.lefort.thomsonreuters@reuters.net))

Keywords: MARKETS AUSTRALIA/FOREX