Australian and NZ dollars pinned down, upbeat data no help

* AUD soft despite solid retail sales & contained inflation in China

* Threat of court action against Fonterra caps kiwi dollar

* ECB meeting eyed, anything less than dovish would lift euro

By Cecile Lefort

SYDNEY/WELLINGTON, Jan 9 (Reuters) - The Australian and New Zealand dollars struggled for traction on Thursday after data in China and at home failed to excite the market ahead of key offshore events in Europe and the United States.

The Aussie AUD=D4 was down at $0.8879, after speculative sellers took out stop-loss offers under $0.8880.

"The market is containing the Aussie at the moment and the topside is fairly limited," said a trader at a European bank in Singapore. He said a needed catalyst could be the European Central Bank policy decision due later in the session or U.S. nonfarm payroll data on Friday. ECONUS

Initial support for the Aussie was seen at $0.8855 ahead of $0.8820, a three-year trough touched last month. Immediate resistance was found at $0.8925.

The Aussie got only a brief lift from upbeat data on retail sales and home building even though they added to evidence that policy stimulus was working on the economy, and reinforced expectations the Reserve Bank of Australia was done cutting rates. News Search ID:nL3N0KI4M8

Neither was the market impressed with favourable figures on Chinese inflation. News Search ID:nL3N0KJ0RN

Consumer inflation eased to 2.5 percent in December, a result that is likely to reassure markets that Beijing has room to keep macro policies stable in order to push on with structural reforms.

China is a key export market for both Australia and New Zealand and any news considered positive for Chinese growth should be supportive of the Aussie.

The New Zealand dollar NZD=D4 was also subdued at $0.8253, having pulled back from a one-month peak of $0.8320 set on Wednesday.

It was pinned down after French food group Danone DANO.PA said it would sue dairy exporter Fonterra FSF.NZ and cut its supply contract with the New Zealand firm following a false alert that sparked the recall of infant formula across Asia.

News Search ID:nL3N0KI4QB

The kiwi dollar is sensitive to news from Fonterra as dairy is New Zealand's top export earner.

Initial support was seen at $0.8245 and $0.8205, with offers cited at $0.8335.

The Aussie remained near five-year lows against the kiwi

AUDNZD=R at NZ$1.0772 on expectations that the Reserve Bank of New Zealand will start raising interest rates soon.

New Zealand government bonds 0#NZTSY= slipped, pushing yields up as much as 4 basis points along the curve.

Australian government bond futures fell in line with Treasuries which were undermined by a strong reading on private U.S. employment.

The three-year bond contract YTTc1 lost 8 ticks to 96.890, while the 10-year contract fell 4 ticks to 95.710, leading to a bearish flattening of the yield curve.

(Editing by Chris Gallagher)

((Cecile.Lefort@thomsonreuters.com)(+61 2 9373-1234)(Reuters Messaging: cecile.lefort.thomsonreuters@reuters.net))

Keywords: MARKETS AUSTRALIA/FOREX