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SINGAPORE: The Australian and New Zealand dollars were set for weekly drops against a tearaway dollar on Friday, weighed by China’s slowdown and bets on US interest rates staying higher for longer.

The Aussie steadied on Friday at $0.6389, but it is down nearly 1% for the week. Strategist Joe Capurso at the Commonwealth Bank of Australia said that the longer it spends below support at $0.6403, the more likely it is to fall further.

“Another month of Chinese deflation is a signal the Chinese economy remains in the doldrums,” he said.

“The persistence of weak Chinese economic data is a weight on Australian dollar that may push it below $0.60 before year-end.”

This week the Reserve Bank of Australia left interest rates on hold, which along with recent data pointing to a slowdown in inflation has markets pricing about a 60% chance that the cash rate has peaked at 4.1%.

The US Fed funds rate is above 5%, and traders have been gradually pricing in more risk of further hikes, and pricing out expectations of cuts in 2024 as US economic data looks strong.

The kiwi dollar on Friday eked a 0.3% gain on to $0.5895, but was about 0.8% lower on the week.

HSBC analysts on Friday cut forecasts for the Aussie and Kiwi, expecting further weakness to year’s end before the currencies find a footing – around $0.62 for the Aussie and $0.55 for the kiwi.

“As negative sentiment on China’s recovery becomes the dominant theme in markets, FX reaction to moves in relative (interest rate) pricing may become asymmetric, as favourable moves may not see much positive feedback,” HSBC analysts said.

Bond markets steadied on Friday, with Aussie 10-year government bond futures jumping 8 ticks to 95.925, though they remain 7 ticks lower on the week.

Three-year futures also rose 8 ticks to 96.240 on Friday. In New Zealand, benchmark two-year swaps were steady at 5.452% and New Zealand’s 10-year government bond yield fell 6.5 basis points to 4.963%.

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