By Cecile Lefort and Charlotte Greenfield
SYDNEY/WELLINGTON, Sept 1 (Reuters) - The Australian dollar struggled for traction on Tuesday as more weak data from China and caution ahead of the Reserve Bank of Australia's (RBA) monthly policy review sapped confidence, while the New Zealand dollar edged up on better economic data.
The RBA is seen certain to hold rates at 0430 GMT, having cut to an all-time low of 2.0 percent in May. The rate outlook for the longer term, however, varies greatly. A majority of 27 economists surveyed by Reuters saw rates staying steady through 2016, but interbank futures have fully priced in a 25-basis point-cut by early next year.
The Australian dollar was marking time at $0.7107, from an overnight low of $0.7082, having shed more than 2 percent last month. The euro exploded nearly 5 percent higher against the Aussie in August, the largest monthly increase in two years.
Much of the decline was due to heightened concerns about a hard landing for the Chinese economy.
An official survey on the Asian giant's manufacturing sector showed another contraction and kept the Aussie in check.
China is the top export market of Australia and New Zealand.
Aussie support was found around $0.7070 and the 6-1/2-year trough of $0.7044 touched last week.
At home, a 4.2 percent jump in building approvals was overshadowed by a widening trade deficit.
The focus is now on the RBA statement and its views on China's developments.
"The RBA will likely highlight the recent Chinese economic concerns, reaffirm that Australian employment is growing and reiterate that the Australian dollar is adjusting to the significant declines in key commodity prices," said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia.
The New Zealand dollar gained 0.5 percent on the day to $0.6368 after data showed an increase in the price of exports in the second quarter, driven by a quarterly rise in dairy prices.
"Momentum certainly suggests further underperformance from NZD. We eye tentative support for NZD/USD at $0.6300, and at $0.8850 in NZD/AUD," said BNZ analysts in a research note.
New Zealand government bonds rose, pushing yields two basis points lower along the yield curve.
Australian government bond futures also climbed, with the three-year bond contract up 2 ticks at 98.250. The 10-year contract added 3 ticks to 97.3350.
The diverging rate outlook between the U.S. Federal Reserve and the RBA sent the spread between Australian and U.S. 10-year government bonds to around 42 basis points, the smallest since April. (Editing by Shri Navaratnam)