Australian dollar hangs tough as kiwi takes the fall

By Wayne Cole

SYDNEY, Feb 20 (Reuters) - The Australian dollar was holding its own against an otherwise firm greenback on Friday as a widening yield premium provided a buffer, while the New Zealand dollar was hamstrung by the fading chance of early rate hikes.

The Aussie was little changed on the day and the week at $0.7056 AUD=D3, having found support at $0.7025 overnight. The recent three-year top of $0.71465 remains the main target for bulls, while bears need to crack $0.6897.

The kiwi dollar was pinned at $0.5970 NZD=D3, having shed 1.1% for the week so far to threaten support at $0.5929. It also hit a near 13-year low on the Aussie at NZ$1.1833 AUDNZD=R after losing 0.9% on the week.

The currency was undone by a dovish outlook on interest rates from the Reserve Bank of New Zealand which badly wrongfooted investors wagering on tighter policy, following a blizzard of cuts over the past year or so.

"The Bank has made it clear that it does not intend to short-circuit the economic recovery that the sharp series of rate cuts were delivered to engineer," said Prashant Newnaha, a rate strategist at TD Securities.

"We stick with the RBNZ on hold this year, and for 25bps hikes in Q1 and Q2 next year."

Markets imply only a 40% chance of an increase in the 2.25% cash rate by September, from 68% early in the week, while October has shifted to 68% from 100%. 0#NZDIRPR

Two-year swap rates NZDSM3NB2Y= are down almost 15 basis points on the week at 2.9263%, while 10-year yields NZ10YT=RR are off 8 basis points at 4.418%.

Australian bond yields have gone the other way as upbeat jobs data narrowed the odds on further rate hikes, leading three-year paper AU3YT=RR to pay a toothsome 83 basis points more than Treasuries.

Markets imply a 76% chance of the Reserve Bank of Australia hiking the 3.85% cash rate in May, and even March has nudged up to 28%. 0#AUDIRPR

"In our view, the market is severely underpricing the risk of a hike in March, which we now see as close to 50%," said Faraz Syed, an economist at Citi.

"Our official forecast is for the RBA to hike again in May, and to change would likely need a strong January monthly CPI, and possibly a strong Q4 GDP."

The monthly consumer price report is due on February 28 and gross domestic product on March 4, ahead of the RBA's next meeting on March 17.