Australian dlr supported by business survey, vulnerable to China & EM risks

* Business survey lifts Aussie

* AUD bounces off 5-mth lows vs yen

* AUD vulnerable to more emerging markets rumble

By Cecile Lefort and Naomi Tajitsu

SYDNEY/WELLINGTON, Jan 28 (Reuters) - The Australian dollar nudged up on Tuesday after an upbeat survey on local business conditions squeezed Aussie bears, while the New Zealand dollars bounced from a three-week low.

The Aussie AUD=D4 found a firmer footing at $0.8764, from $0.8757 in early trade, after a private measure of Australian business conditions surprisingly jumped to its highest in more than 2-1/2 years in December. News Search ID:nS9N0DN01A

"It injected new life in the Aussie... The reading was quite encouraging," said Sean Callow, a senior currency strategist at Westpac Bank.

The survey outcome was enough to trigger a classic squeeze on short positions which had been building up on concerns about economic health in China and emerging markets.

The market often uses the Aussie as a liquid proxy to hedge against weakness, or wager on strength, in Asia.

The Australian dollar dropped as far as $0.8660 on Friday, the lowest since mid-2010.

Callow said near-term risks for the Aussie are likely to come from emerging markets, particularly China and Turkey. He expects little reaction from the U.S. Federal Reserve's two-day policy meeting to start later in the session. The central bank is widely seen likely to slice another $10 billion from its bond buying.

Dealers cited sellers near $0.8770 with resistance found at the 10-day moving average around $0.8995.

A break above would target $0.8824, the 38.2 percent retracement of the $0.8660-$0.9087 fall.

Profit-taking allowed the Aussie to bounce from a five-month trough against the yen to be at 90 yen AUDJPY=R . It dropped as far as 89.51 on Monday from a peak of 94 yen earlier this month.

It still looked vulnerable with 5-, 10- and 20-day moving averages pointing south. Immediate resistance was found near 90.55.

The Aussie also outperformed its kiwi neighbour AUDNZD=R , on the back of the solid business survey to hit an intraday high around NZ$1.0655.

The kiwi was hit after New Zealand Finance Minister Bill English was reported saying the currency was overvalued against the Aussie.

"It's an increasing headwind for those businesses that are selling into Australia," English was quoted by Fairfax Media as saying in reference to the kiwi's climb to an eight-year high around NZ$1.0485 earlier this week.

"So it's a bit of a concern, but I would imagine the Australian economy will turn out to be a bit stronger than people would expect and we'd like to see that exchange rate drop back."

The New Zealand dollar NZD=D4 traded at $0.8230, pulling ahead from a three-week low of $0.8195 set overnight after strong support around that level had buffered against further losses.

The $0.8190-$0.8195 region contains the currency's 55-day moving average and the 23.6 percent retracement of the kiwi's October-November sell-off.

The kiwi has been supported on expectations that the Reserve Bank of New Zealand (RBNZ) will raise interest rates soon to counter inflation risks stemming from a buoyant economy, with some betting that the central bank may tighten policy as early as this week CSSY .

With most economists expecting the RBNZ will wait until March to raise rates by 25 basis points from a record low 2.5 percent, a hike at the central bank's policy review on Thursday could boost the kiwi towards $0.8400 in the near term.

If it stays on hold, analysts say the kiwi could fall towards $0.8150, where bids are suspected.

New Zealand government bonds 0#NZTSY= slipped, pushing yields on short-dated bonds 3.5 basis points higher.

Australian government bond futures came off one-month highs with the three-year bond contract YTTc1 down 8 ticks at 97.110. The 10-year contract YTCc1 lost 6 ticks to 95.985, leading to a bearish flattening of the yield curve.

Likewise, yields on 10-year cash bonds recovered from a three-month trough to be last at 4.07 percent, having dropped as far as 4.04 percent.

(Editing by Shri Navaratnam)

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

Keywords: MARKETS AUSTRALIA/FOREX