Australia, NZ dollars rally as Turkey's big rate hikes calm markets

* Aussie, kiwi dollars up after decisive action by Turkey to stem lira's slide

* CBRT delivers massive interest rate hikes, lira and risk currencies squeezed higher

* RBNZ policy decision on Thursday next in focus, amid some rate hike speculation

* Fed also keenly awaited, further reduction in bond-buying seen

By Ian Chua and Naomi Tajitsu

SYDNEY/WELLINGTON, Jan 29 (Reuters) - The Australian and New Zealand dollars rallied broadly on Wednesday after Turkey stunned markets by delivering big hikes in interest rates to stem a slide in the Turkish lira.

In a move that helped shore up riskier currencies that had sold off in sympathy with the lira last week, Turkey's central bank more than doubled some of its key rates. News Search ID:nL5N0L24FE

"The knee jerk reaction was to buy risk assets, on the assumption that this aggressive move would stop Turkey exporting financial stress to emerging markets and the likes of AUD," said Sean Callow, strategist at Westpac Bank in Sydney.

The Aussie dollar, often used as a liquid proxy for risk assets, climbed as high as $0.8813 AUD=D4 pulling further away from a 3-1/2 year trough of $0.8660 plumbed on Friday. It last traded at $0.8798.

Against the yen, the Aussie hit a one-week high of 90.99

AUDJPY=R as investors quickly unwound safe-haven trades that had recently lifted the Japanese currency.

The kiwi rose as far as $0.8291 NZD=D4 , further recovering from a three-week low of $0.8195 hit on Monday. It jumped more than half a yen to 84.66 NZDJPY=R , having already rebounded from a seven-week trough of 83.65 earlier this week.

Against the Aussie, it was unchanged at NZ$1.0628

AUDNZD=R , still near an eight-year high around NZ$1.0485 per Australian dollar hit late last week.

The kiwi, however, is unlikely to see much more action as investors are wary of taking big positions ahead of the Reserve Bank of New Zealand's monetary policy review on Thursday.

Markets are pricing in a 40 percent chance CSSY that the RBNZ will raise interest rates by 25 basis points from a record low 2.5 percent, which would put New Zealand way ahead of most other developed nations in lifting rates. News Search ID:nL5N0KW050

Still, most economists expect the central bank will wait until March to raise rates, which could deliver a near-term setback for the kiwi.

"You'd probably see as sell-off of 50 pips to start with and see what happens after that," said Tim Kelleher, head of institutional FX sales at ASB.

"The market is long kiwi overall and long NZD/AUD based on interest rate differentials, so you might see a bigger move in that cross," he said.

Offers above $0.8300 and through to $0.8350 could cap any gains in the kiwi before the RBNZ announcement, while a rate rise would likely push the currency towards $0.8400 and beyond.

Any downside in the kiwi could be limited to around $0.8150, given strong bids seen below that level.

Australian and New Zealand government bonds came under pressure as Asian stocks staged a relief rally on the Turkish news. That lifted NZ bond yields 0#NZTSY= by around 2.5 basis points at the long end of the curve.

Australian three-year bond futures YTTc1 fell 8 ticks to 97.080, while the 10-year futures shed 6.5 ticks to 95.970.

(Editing by Shri Navaratnam)

((ian.chua@thomsonreuters.com)(+61 2 9373 1871)(RM: ian.chua.thomsonreuters.com@reuters.net))

Keywords: MARKETS AUSTRALIA/FOREX