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SYDNEY, Dec 19 AAP

December 19 2012, 5:34PM

The Australian dollar is slightly lower following weakness in Chinese stocks.

At 1700 AEDT on Wednesday, the local currency was trading at 105.16 US cents, down from 105.34 cents on Tuesday afternoon.

Commonwealth Bank currency strategist Joseph Capurso said the Australian dollar had traded in a narrow range on Wednesday but a slide in the Shanghai Composite Index, earlier in the day, had put some downward pressure on the currency.

"The Chinese stock market is a little bit weaker, maybe that has put a bit of downside on the Aussie dollar but it's hard to scratch around for a reason really," he said,

The lack of volatility in the Australian dollar came despite a positive mood in global markets, which saw shares in the US, Asia and Europe rally and the euro surge to a seven-month high against the US dollar.

Mr Capurso expected the Australian currency to trade in a narrow range in the lead up to Christmas, unless there were significant developments in US debt negotiations.

Democrats and Republicans are trying to reach a compromise to bring down the country's debt while avoiding a "fiscal cliff" of automatic tax hikes and spending cuts due to apply from the beginning of 2013.

"If it gets resolved the Aussie would put on a cent or maybe more very quickly but that would fade off eventually," Mr Capurso said.

"But if the market gets worried we are going to fall of the cliff the Aussie is going to fall."

At 1700 AEDT, the Australian dollar was at 88.66 Japanese yen, up from 88.51 Japanese yen on Tuesday, and at 79.37 euro cents, down from 79.98 euro cents.

Meanwhile, Australian ten-year bond futures prices are slightly lower but trading in a tight range as investors prepare for the Christmas break and monitor developments in US budget negotiations.

UBS interest rate strategist Matthew Johnson said traders were preparing for the Christmas break, but developments in the US negotiations could still move the market over the coming days.

"I think people are winding down risk because they will be on holidays and because they expect the market will be less liquid," he said.

At 1630 AEDT on Wednesday, the March 10-year bond futures contract was at 96.630 (implying a yield of 3.370 per cent), down from 96.640 (3.360 per cent) at Tuesday's close.

The March three-year bond futures contract was trading at 97.220 (2.780 per cent), level with its previous local close.

By Evan Schwarten