By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, Feb 5 (Reuters) - The Australian and New Zealand dollars entered a lull on Friday ahead of a closely watched U.S. jobs report, but remained well on track to end the week with hefty gains.
The Australian dollar AUD=D4 edged lower to $0.7187 after local retail sales data came below forecasts, but within spitting distance of a one-month peak of $0.7242.
It remained 1.6 percent higher for the week largely due to a sharp drop in the U.S. dollar as markets lengthened the odds on higher U.S. Interest rates this year.
"(Retail data was) well below consensus, but it was largely ignored as traders continue to reprice the slope of 2016 U.S. Federal reserve board rate hikes," said Stephen Innes, senior trader at FX/CFD firm OANDA Australia and Asia Pacific.
Also underpinning the Aussie were comments by the Reserve Bank of Australia (RBA) seeing potential improvement in the economy.
In a quarterly report issued on Friday, the central bank reiterated that any cut in interest rates would depend on jobs data and whether recent financial market turbulence pointed to a weaker global economy. Innes said the RBA's hawkish tone could lead to a further unwind of speculative bets against the Aussie, particularly given its relatively high yield.
Markets now await U.S. jobs data with forecasts of 190,000 jobs created in January. ECONUS
The New Zealand dollar NZD=D4 eased to $0.6692, having touched a one-month peak of $0.6747 on Thursday. It has leapt 3.2 percent this week and away from a January low of $0.6348.
"Further caution from 'hawkish' Fed Governor Kaplan and softer US data continued the US dollar liquidation, driving this cross to test topside resistance," said ANZ Senior FX Strategist Sam Tuck.
Dallas Federal Reserve Bank Robert Kaplan on Thursday said the central bank should be "patient" on interest rate increases.
New Zealand government bonds 0#NZTSY= eased, sending yields 2.5 basis points higher at the short end and 2 basis points higher at the long end.
BNZ FX Strategist Jason Wong said the market continues to digest this week's strong local jobs data and was pricing in only a 12 percent chance of a rate cut in March. Last week, this was closer to 50 percent.
"Overall, this week about 6-7 basis points of easing has been priced out of the curve," he said.
Australian government bond futures were firm, with the three-year bond contract YTTc1 up 1 tick at 98.180. The 10-year contract YTCc1 added 3 ticks to 97.4600, while the 20-year contract YXXc1 was half a tick higher at 96.9200. (Editing by Sam Holmes)