By Cecile Lefort
WELLINGTON, Oct 1 (Reuters) - The Australian and New Zealand dollars were squeezed higher on Thursday after Chinese manufacturing activity was not as bad as feared, giving some reprieve to the soggy Antipodean currencies.
The Australian dollar AUD=D4 gained a third of a cent to $0.7043 on the day, pulling away from a low of $0.6984 touched earlier in the week. Resistance was found at $0.7066, the 38.2 percent retracement of the September move.
Much of the strength came after China's official Purchasing Managers' Index (PMI) inched up to 49.8 in September, a touch better than a forecast of 49.6. A private survey of Chinese manufacturing activity also delivered a slightly better outcome than an earlier estimate.
The Australian and New Zealand dollars are highly sensitive to data out of China, a key export market. The Aussie ended the third quarter 9 percent lower, the largest such drop in two years, partly on worries of a hard landing for China's economy.
Also undermining the Antipodean currencies are diverging interest rate outlooks between the United States and most western nations.
While the Federal Reserve is seen raising rates as early as this year, Australian debt markets are fully priced for an interest rate cut by the Reserve Bank of Australia (RBA) by mid-2016.
The RBA holds its monthly policy meeting on Oct. 6 and all 25 economists polled by Reuters see rates steady at a record low of 2.0 percent.
The New Zealand dollar NZD=D4 also received a lift after the Chinese surveys to be last at $0.6408, from $0.6391.
It has remained remarkably stable in the past month, having traded in a narrow range of $0.6244 to $0.6458. It shed 5.4 percent in the third quarter when it dropped to a six-year low under 62 cents.
Its outlook was negative with economists expecting the Reserve Bank of New Zealand to cut rates again to stimulate a sluggish economy.
New Zealand government bonds eased, sending yields two basis points higher on the longer end of the curve.
Australian government bond futures were quiet, with the three-year bond contract up one tick at 98.210. The 10-year contract was half a tick lower at 97.3700. (Editing by Jacqueline Wong)