By Wayne Cole and Charlotte Greenfield
SYDNEY/WELLINGTON, Feb 19 (Reuters) - The Australian and New Zealand dollars looked to edge higher on Monday as deficit worries haunted their U.S. counterpart, while wages data due later in the week could be pivotal to the outlook for Australian interest rates.
The Aussie AUD=D4 was hovering at $0.7920, having recoiled from a top of $0.7988 on Friday when the U.S. currency rallied on short covering after a run of steep falls.
The Aussie remains well above a low of $0.7759 hit earlier in the month and has found solid support around $0.7890.
"The resumption of a broad-based U.S. dollar decline last week seems rather bearish for its near term prospects, with an increased focus on the widening U.S. budget deficit," said Westpac forex analyst Sean Callow.
The budget deficit is projected to explode to over $1 trillion this year, a lot of which will likely be borrowed from offshore. This week alone, U.S. Treasury is offering a record $258 billion in new debt with maturities from three-months out to seven years. the greenback does continue to struggle, then AUD/USD should probe the $0.8000/50, but the Aussie might be less impressive on other crosses," added Callow.
The Aussie has been notably weak on the Japanese yen, touching an eight-month trough at 83.28 yen AUDJPY= at one point last week.
The currency also faces a domestic hurdle in wage data due on Wednesday where a weak result would further widen the odds on a rate hike this year.
Median forecasts are that wages rose a modest 0.5 percent in the fourth quarter for a steady annual pace of 2.0 percent, just a tick above record lows.
The Reserve Bank of Australia (RBA) last week said it expected wage growth to accelerate only very gradually, suggesting it would take a substantially higher outcome to alter the outlook for steady rates.
The New Zealand dollar NZD=D4 was 0.1 percent firmer at $0.7396, a little below a six-month high of $0.7436 hit on Friday.
The kiwi's short-term trajectory could largely be determined by Wednesday's release of the Federal Reserve's minutes for its January meeting, which could spark a rally in the U.S. dollar if markets detected a hawkish tone.
On the local front, an auction for the country's largest goods export, dairy, was expected to show flat prices after a recent pick up.
New Zealand government bonds 0#NZTSY= eased, sending yields 1.5 basis points higher at the short end of the curve.
Australian government bond futures edged higher, with the three-year bond contract YTTc1 up 1.5 ticks at 97.850. The 10-year contract YTCc1 gained 3.5 ticks to 97.1150. (Editing by Shri Navaratnam)