Australia, New Zealand dollars up for third week as rate outlooks favour

By Wayne Cole

SYDNEY, Dec 12 (Reuters) - The Australian and New Zealand dollars are heading for a third week of gains on Friday as investors wager the next move in domestic interest rates will be up, even as U.S. rates are expected to keep falling.

The Aussie was holding at $0.6668 AUD=D3, having bounced from a low of $0.6624 overnight to give it a gain of 0.5% for the week so far. That was just off a three-month top of $0.6685 and within striking distance of major resistance at $0.6706.

The kiwi dollar stood at $0.5814 NZD=D3, having climbed 0.6% for the week to reach a two-month high of $0.5831. The next bull target is $0.5844, with support at $0.5762.

The Aussie had taken a brief knock on Thursday when data showing a surprise drop in employment led markets to slightly scale back the risk of hikes next year. 0#AUDIRPR

The probability of a quarter-point rise in the Reserve Bank of Australia's 3.6% cash rate is put at 18% for February, lifting to 70% for May. A move in August is almost fully priced.

"We believe the November jobs report was a head-fake, and better data over the coming months will keep February live," said Faraz Syed, an economist at Citi.

"We expect a hike in February on the back of rising inflationary pressures and stronger domestic economic momentum," he added. "A risk to our view is that the Q4 CPI print is weaker than expected, and the RBA has the option to wait it out."

The consumer price report for the fourth quarter is due on January 28 and analysts fear core inflation could top 3%, the ceiling of the RBA's 2% to 3% target band.

Across the Tasman, a surprisingly strong 1.2% increase in card spending was just the latest in a run of improving economic data that has seen investors toy with a possible tightening.

The Reserve Bank of New Zealand signalled it was done easing when it cut rates to 2.25% in November, and markets are now priced for a hike by next September. 0#NZDIRPR

As a result, yield spreads over Treasuries have risen by more than 50 basis points since November, boosting the kiwi.

"There's potential for further kiwi gains during the month ahead," said Imre Speizer, an economist at Westpac. "If the break above $0.5800 resistance is sustained, we'd be targeting $0.6000 over that horizon."