Australian dollar buoyed by positioning, NZ dollar dips on RBNZ

* Strong support for AUD at 87 cents

* Aussie to show biggest weekly gain vs NZD since August

* RBNZ repeats rates to go up soon; flags China, Europe risks

By Cecile Lefort and Gyles Beckford

SYDNEY/WELLINGTON, Jan 31 (Reuters) - The Australian dollar was heading for a rare weekly gain on Friday as an easing in emerging market tensions sparked a wave of short covering, although the longer-term trend remained downwards.

Much of the move came against the New Zealand dollar as speculators trimmed long positions after the Reserve Bank of New Zealand disappointed some bulls by not hiking rates this week, even though a rise in March looks a near certainty.

The Aussie rallied versus its kiwi cousin to reach NZ$1.0788

AUDNZD=R , bringing gains for the week to 2 percent. If sustained, it would be the biggest weekly gain since August.

The Aussie AUD=D4 was holding at $0.8795, having bounced from $0.8710 overnight and a trough of $0.8660 set last week. It looked on track for the biggest weekly rise in more than three months, having climbed 1.5 percent.

Dealers said the Aussie was squeezed higher after selling by hedge funds failed to push it below 87 cents on Thursday, following HSBC's soft reading of China's manufacturing activity.

The Aussie is often used as a proxy to hedge against risks in less liquid emerging markets.

Strong resistance was found at $0.8825 and a break would target last week's peak of $0.8889.

Short-covering action was felt across the board, sending the Aussie more than 1 percent higher over the past 24 hours against the euro, yen, pound and Swiss franc.

The kiwi dollar was kept under pressure at $0.8155 NZD=D4 after RBNZ Governor Graeme Wheeler said a rate rise would come soon, but the speed of tightening would depend on the flow of domestic data and events in China and Europe. News Search ID:nL3N0L5018

The central bank kept rates on Thursday at a record low of 2.5 percent.

"Markets have become very excited over the last couple of months by the prospect of an aggressively front-loaded cycle, perhaps involving some 50 basis points moves at individual meetings," said Ben Jarman, an economist at JPMorgan.

"Wheeler's comments today suggest he is comparatively relaxed," he added.

Debt markets CSSY are still pricing in a 96 percent chance that the RBNZ will raise rates by 25 basis points in March, with nearly 122 basis points of tightening discounted over the next 12 months.

That would place the RBNZ well ahead of the major central banks, many of which continue to offer monetary stimulus to boost their economies, and keep the kiwi supported around $0.8100-$0.8400 in the midterm.

New Zealand government bonds 0#NZTSY= eased, sending yields as much as 3.5 basis points higher along the curve.

Australian government bond futures fell with the three-year bond contract YTTc1 down 5 ticks at 97.100. The 10-year contract lost 2 ticks to 96.040, 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