Long-term bond yields have continued to rise as foreign exchange markets treaded water before a key US jobs report, which could kick-start a near-term reduction in the US Federal Reserve's asset purchase program.
Yields for 10-year Australian government bonds rose to two-year highs of 4.44 per cent, as tapering expectations heightened before the payrolls and unemployment data set to be released on Saturday morning.
The Australian dollar lifted off its three-month lows of US89.99¢ on Friday, trading about US90.60¢. Investors looked through a report showing that the local construction sector had expanded for the second consecutive month.
"It's a huge risk event and markets will want to see that outcome before they start to become a bit more definitive about a possible December taper," NAB currency strategist Emma Lawson said of the caution.
The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index rose 0.8 points to 55.2 last month on the back of an improvement in new orders and deliveries. It was the highest reading since November 2010. All the major subsectors grew for the month, although house building and apartments lost some ground, AiG said.
"[It] adds to the signs that the long-awaited rebalancing of the domestic economy may be getting under way on the back of low interest rates and a lift in business and household confidence," AiG director for public policy Peter Burn said.
The construction data came on the heels of weaker-than-expected third-quarter growth figures, which pushed the dollar sharply lower on Wednesday and kept it on track to record a seventh straight week of declines.
In contrast, optimism about the US economy has been building following a recent spate of improving data.
While analysts still forecast the Fed will start trimming its $US85 billion-a-month ($93.8 billion-a-month) bond-buying program in March, they were ramping up expectations of a December taper following a strong ADP jobs report earlier this week.
Economists expect the official payrolls data to show that 185,000 jobs were added to the economy for the month, and for the unemployment rate to have fallen from 7.3 per cent to 7.2 per cent. Some analysts were also predicting a possible reading of about 200,000 jobs, Ms Lawson said.
The increased likelihood of a near-term stimulus reduction has seen yields on 10-year US Treasuries return to September highs. They were trading about 2.87 per cent on Friday.
"Anyone who is risk averse is allocating out of long-end bonds at the moment, and that's what's been pushing yields higher and prices down," UBS interest rate strategist Andrew Lilley said.
The Australian dollar could be one of the main currencies that could feel the brunt of a strong payrolls report, Citi currency strategist Todd Elmer said.
"[Tapering] is likely to be associated with pressure on Asian currencies, which should see proxy selling of [the Australian dollar] by the longer-term investors who use [the dollar] as a means to gain exposure to the region," he said.