By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, Jan 7 (Reuters) - The Australian and New Zealand dollars skidded to multi-week lows on Thursday after China's central bank fixed its yuan currency far lower than many expected, spurring speculatuin that it was aiming for a sustained depreciation to boost exports.
The Australian dollar AUD=D4 dropped to $0.7025 from $0.7061 early, having fallen 1.4 percent on Wednesday. Major support was found at $0.7016 and a break would open the way to a six-year trough of $0.6892 touched in September.
It has skidded three cents in one week amid renewed fears about China and a steep drop in oil prices.
The latest blow came after China surprised the market for the second day with a sharp weakening of the yuan, fuelling fears of a currency war. The Chinese central bank fixed the midpoint of the yuan's daily trading range 0.5 percent lower than Wednesday's fix, the biggest move since a near 2 percent devaluation of the currency in August last year. said the move could suggest the Chinese economy may be in worse shape than initially thought.
Against this backdrop, the Australian dollar looked vulnerable as it is often used as a liquid proxy for China plays. It has shed 10 percent last year.
Not helping the outlook were tensions in the Korean Peninsula and falling commodity prices, including iron ore, Australia's top export earner.
All of that underpinned the safe-haven yen, which has leapt around 4 yen in one week against the Antipodean currencies. The Aussie hit 82.94 yen, its lowest since September, while the kiwi dropped as far as 78.02 yen.
At home, a mixed bag of data did little to alter expectations of a 25-basis point-cut to 1.75 percent by the Reserve Bank of Australia. Interbank futures 0#YIB: implies a 40 percent chance of an easing by April.
The New Zealand dollar NZD=D4 fell to a one-month trough of $0.6616, from $0.6636 early. BNZ Currency Strategist Jason Wong said fair value was currently close to the $0.6400 market and he expected "further downward pressure" over the rest of the month.
New Zealand government bonds gained, sending yields 3 basis points lower. Yields have fallen over the past few days and "some of the move has reflected a catch-up from offshore post the holidays and illiquid market," said Wong.
He said, however, government bonds strongly underperformed swaps late last year, with the 10-year swap-government bond spread moving into negative territory, reflecting offshore behaviour.
"This move didn't make a lot of sense and now we're seeing a reversal of that move," he said.
Australian government bond futures rose, with the three-year bond contract up 4 ticks at 98.040. The 10-year contract gained 4.5 ticks to 97.2750.
The 20-year contract was steady at 96.7600. (Editing by Simon Cameron-Moore)