By Cecile Lefort and Rebecca Howard
SYDNEY/WELLINGTON, May 9 (Reuters) - The Australian and New Zealand dollars held on to modest gains on Monday, having bounced off lows after recent sharp falls left the currencies overstretched.
The Australian dollar AUD=D4 edged up to $0.7380, from a two-month trough of $0.7338 set on Friday. Key support was found around $0.7330 with resistance near 74 cents.
The Aussie tumbled more than 3 percent last week after the Reserve Bank of Australia (RBA) slashed its inflation forecasts, prompting markets to price in two more rate cuts.
Interbank futures 0#YIB: imply a one-in-four chance of seeing rates drop to 1.25 percent by year-end, from 1.75 percent now.
Data from the Commodity Futures Trading Commission showed speculators reduced long Aussie positions to just under 100,000 contracts the week ended May 3, from 109,932 the week before. they were still net long 52,395, suggesting the Aussie had room to fall.
"Expectations of further rate cuts by the RBA will likely see net long positions in AUD reduced further," said ANZ in a note.
In the short-term, dealers expect the Aussie to pause between $0.7250 and $0.7550, before heading south to $0.7065.
Australian job advertisements eased in April, providing further signs demand for labour had peaked after a very strong run in 2015. New Zealand dollar NZD=D4 nudged up $0.6845, from a four-week low of $0.6807 touched last week. It slipped 2 percent last week, its second-largest drop this year, after the RBA's easing reinforced expectations of a similar move by the New Zealand central bank.
Markets imply a 90 percent of a cut in June to 2 percent, from 60 percent last week.
The kiwi had a muted reaction to the weaker-than-expected U.S. jobs data in particular after New York Fed President William Dudley said he expects two rate hikes this year.
The next focus is on Wednesday's Reserve Bank Financial Stability Report.
New Zealand government bonds 0#NZTSY= eased, sending yields between 0.5 and 2 bps higher across the curve.
Australian government bond futures recoiled from recent peaks, with the three-year bond contract YTTc1 unchanged at 98.440, but a whisker away from a record of 98.460. The 10-year contract YTCc1 shed 4 ticks to 97.6800, while the 20-year contract YXXc1 lost 5.5 ticks to 97.0600.
The premium between Australian AU2YT=RR and U.S. US2YT=RR two-year cash bonds stood at 87 basis points, having narrowed on Friday to a decade-low of 86 basis points.
Local two-year yields edged up to 1.6 percent, from an all-time low of 1.57 percent set last week.