By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, Jan 8 (Reuters) - The Australian and New Zealand dollars broke a four-day losing streak on Friday after China's central bank wrong-footed investors by setting a much higher yuan guidance rate than expected.
The Australian dollar AUD=D4 was squeezed more than half a U.S. cent higher to $0.7060, pulling away from a three-month low of $0.6981 set on Thursday. The Aussie is often used as a liquid proxy for China plays.
Yet China's erratic policies suggest the volatility is far from over.
"It is extremely difficult to see what China is trying to achieve, and that's not helping," said Robert Rennie, global head of market strategy at Westpac in Sydney.
China's central bank started on Tuesday to sharply weaken its currency, spurring speculation it was aiming for a sustained depreciation to help boost exports.
Rennie said he would be surprised to see the Aussie above $0.7125 because of China's need for a weaker currency. The local dollar has skidded 3.2 percent this week.
Against the yen, the Aussie bounced a full yen to 83.28 AUDJPY=R but was still within reach of a four-month trough set overnight. It has plunged 5.3 percent this week and a break under 81.85 yen AUDJPY=R would be the weakest in two years.
With the tumult in markets and China taking all the attention, investors brushed off data at home showing a 0.4 percent rise in retail sales in November which was in line with forecasts. market now awaits U.S. non-farm payrolls, where a strong reading led the market to price in more interest rate hikes this year and so lifting the U.S. dollar. ECONUS
The New Zealand dollar NZD=D4 jumped 0.5 percent to $0.6625, having touched a one-month low of $0.6.590. It was still on track for a 2.5 percent loss this week.
Yet, some analysts said the kiwi proved resilient.
"Despite the risk-off mood and Asian currencies being hit, the NZD was surprisingly robust," said BNZ FX Strategist Jason Wong.
He noted its outperformance against the Aussie, which likely reflected Australia's closer association with China's economy and weaker industrial commodity prices.
New Zealand government bonds 0#NZTSY= eased, sending yields slightly higher across the curve.
Australian government bond futures were off two-month peaks. The three-year bond contract YTTc1 eased 3 ticks to 98.020. The 10-year contract YTCc1 shed 5 ticks to 97.2350, while the 20-year contract YXXc1 was down 4.5 ticks to 98.7550.