The Australian dollar battled to hold its ground on Wednesday amid uncertainty whether the latest recovery in risk appetite could last and talk local interest rates are unlikely to rise as fast as earlier thought.
An overnight rally in growth-linked currencies ran out of fizz on renewed concerns about China's move to tighten bank lending. Two of China's biggest banks have called back loans in the second half of January to fall into line with the government's directive to slow lending.
Australia is China's biggest trading partner and worries that authorities there were trying to slow the pace of growth has triggered concerns it could lead to a slowdown in demand for Australian exports.
At the local close, the dollar was trading at $US0.8872, well above Tuesday's low of $US0.8780. It saw a huge sell-off on Tuesday after the Reserve Bank of Australia (RBA) stunned investors by leaving rates unchanged at 3.75 per cent.
Near-term resistance for the Aussie seen at $US0.8925 while stops are lined up around $US0.8780, traders said.
"In the lead-up to the US non-farm payrolls data we could see some reduction in risk," David Scutt, a trader at Arab Bank Australia. "People are still cautious about this entire move up."
US non-farm payrolls report will be released on Friday while anecdotal evidence of the US labour market will be published later on Wednesday when Challenger jobs cuts and the ADP employment report for January will be released.
Sentiment towards riskier assets like stocks and commodities received a boost on Tuesday from strong US corporate earnings and improved economic data from the housing sector.
Asian stocks were also broadly higher lending some support to the dollar against the yen. The Aussie was steady against the yen at 80.31 yen, off Monday's six-week trough.
Still, the Aussie is likely to find breaking past the $US0.9000 level hard in the near term as investors pare chances of rate hikes in the coming months.
Markets are pricing in the cash rate at around 4.65 per cent in the next 12 months, down from around 4.85 per cent late last week.
Markets see only a one-in-three chance of a March rate rise with analysts now uncertain about the Reserve Bank of Australia's thinking. The central bank has its quarterly monetary policy statement on Friday to outline its rationale.
Aussie bond futures were down as the yield curve unwound a little of Tuesday's sharp steepening. Three-year bond futures indicated 0.04 points down at 95.23, and ten-year futures shed 0.010 points at 94.475.
