By Wayne Cole
SYDNEY, Feb 12 (Reuters) - The Australian and New Zealand dollars were hostage to developments in slow-moving Sino-U.S. trade talks on Tuesday, though sentiment did get a lift from hints of progress in avoiding another U.S. government shutdown.
Republican Senator Richard Shelby, one of the congressional negotiators working on border security, said late on Monday that an "agreement in principle" had been reached. and Chinese officials expressed hopes on Monday that a new round of tariff discussions would bring them closer to easing their seven-month trade war. Aussie dollar AUD=D3 inched up to $0.7074, just a whisker above a five-week trough of $0.7054 which also marks major chart support. The next technical bulwark is in the $0.7017/7025 area.
Domestic economic data were mixed and did nothing to change the market's dovish outlook for interest rates.
A closely-watched survey of Australian business showed a welcome bounce in January after an alarmingly sharp drop the month before, but still pointed to cooling growth ahead.
The National Australia Bank's index of business conditions, released on Tuesday, rose 4 points to +7 in January. That recovered around half of December's steep slide and left it just above the long-run average of +6. a result, NAB dropped its call for the next move in rates to be a hike in late 2020.
"With inflation remaining weak and growth weaker than the RBA expected, the risk is that the Bank will act to bolster the economy should the labour market show any signs of deterioration or consumer spending weaken further," said NAB chief economist Alan Oster.
Just last week the Reserve Bank of Australia (RBA) was forced to cut its forecasts for economic growth and inflation after a run of disappointing data. RBA Governor Philip Lowe tempered a long-held tightening bias, saying an easing might be just as likely as a hike.
Investors have sharply narrowed the odds on a cut in interest rates this year, with futures 0#YIB: implying a 76 percent probability of a quarter-point easing by December.
Strains in the housing market were also underlined by figures showing a steep 6.1 percent slide in the number of home loans taken out in December.
The New Zealand dollar NZD=D3 eased to $0.6728, nearing major support around $0.6707, as speculators wagered the Reserve Bank of New Zealand would take a cautious stance at its policy meeting on Wednesday.
"We expect the RBNZ to out-dove the RBA and emphasise "downside risks"," said Annette Beacher, chief Asia-Pacific macro strategist at TD Securities.
"The RBNZ can acknowledge that activity has been patchy, and global downside risks have increased, such that a rate cut scenario can be resurrected."
Yields on two-year government debt NZ2YT=RR have already dived to their lowest in modern history at 1.61 percent, well below the 1.75 percent cash rate.
Australian bond yields are near their lowest since late 2016, with three-year yields at 1.668 percent AU3YT=RR moving closer to the 1.5 percent overnight rate.
The 10-year futures contract YTCc1 was off 4.5 ticks on Tuesday at 97.8950. (Editing by Jacqueline Wong)