NZ dollar hands back gains on recession concerns

WELLINGTON, July 10 (Reuters) - The New Zealand dollar NZD= retreated from one-week highs on Thursday as weak manufacturing data added to the case that the economy was in a recession and interest rates will soon start falling.

The kiwi was briefly lifted by a stronger Aussie AUD=, which gained on robust jobs data, but pulled back as investors shifted their focus back to local fundamentals.

"Ongoing concerns about a recession and a growing conviction the Reserve Bank of New Zealand will be cutting rates in coming months will limit the topside in the NZ dollar," said Danica Hampton, currency strategist at Bank of New Zealand.

At 0500 GMT the kiwi was at $0.7563/65 compared with around $0.7575 in early local trade and a nine-day high of $0.7620 hit in offshore session on a weaker U.S. currency. It stood at $0.7545/50 on Wednesday.

Bank of New Zealand/Business NZ's performance of manufacturing index showed activity in the sector slowed to its lowest in two-and-a-half years in June as companies struggled with a slowing economy and rising costs [nWEL121041].

The data comes amid a growing view the economy is already in recession for the first time in over 10 years.

Economic activity contracted for the first time in over two years in the first quarter and most analysts expect it dropped again in the June quarter, meeting the technical definition of recession as two straight quarters of contraction.

Investors are awaiting retail sales data for May and second quarter inflation numbers due on Monday and Tuesday respectively.

Retail sales are expected to have risen a modest 0.1 percent in May, while the consumer price index is seen rising 1.4 percent during the April-June period, according to a poll. [NZ/POLL]

The market, which currently sees a 50:50 chance of a rate cut by the RBNZ at its policy meeting on July 25, may rush to factor in a greater chance if the retail and inflation figures come in weaker than expected, analysts say.

Longer-dated New Zealand bonds firmed, with the benchmark 10-year bond NZ10YT=RR yield slipping seven basis points to 6.18 percent, after U.S. Treasuries gained on safe-haven buying.

NZ government sold a total of NZ$150 million of bonds through auctions on Thursday. It accepted less than the full NZ$50 million offered for the November 2011 bonds, but made up by accepting a greater amount for the April 2013 bonds. For results see: [nWLF000958]. (Reporting by Kazunori Takada; Editing by James Thornhill)