NZ dollar sags as caution returns; debt firmer

* NZ dollar falls back to low point of the week

* Investors cautious risk rally has gone too far, too fast

WELLINGTON, Aug 27 - The New Zealand dollar <NZD=> fell to its lowest point of the week on Thursday, as caution about the extent and speed of a rally in stocks and riskier assets returned.

Investors kept a wary eye on Chinese stocks, a key barometer of risk in recent weeks, for any reaction to the Chinese government's announcement it would take steps to curb industrial overcapacity.

The New Zealand dollar had retreated in the offshore session after failing for a third time this week to break through the $0.69 level.

"The past three days have seen a lack of follow through in this rally which started in early July. Last night's turnaround on its own is not enough evidence to suggest a deeper correction is about to unfold," said Westpac senior market strategist Imre Speizer.

"A break below 0.6760 ... would have us ringing the alarm bells."

The kiwi was trading at $0.6790/95 at 0500 GMT from Wednesday's late local trade around $0.6866/68.

The yen rose broadly as investors started to have second thoughts about whether the rally in risky assets had run too far ahead of reality in the global recovery.

The NZ dollar was more than 0.7 percent down at 63.63 yen <NZDJPY=R>, its low point for the week. The yen has tended to be a beneficiary of any investor caution and safe haven demand.

The kiwi also pulled back against the Aussie <NZDAUD=R> after data showed unexpected strength in private new business investment in Australia, adding to the case for higher interest rates. See [ID:nSYD439944]

The currency was unmoved by data showing New Zealand's annual trade deficit narrowed to its smallest in six years in July. The deficit of NZ$2.48 billion, against forecasts of NZ$2.55 billion, came from a sharp slump in imports, reflecting the impact of the 15 month long recession. See [ID:nWEL000973]

NZ building data and household borrowing data is due on Friday.

The NZ dollar is seen supported at $0.6750 with resistance initially around $0.6830.

New Zealand government bonds were firmer, with the yield on the benchmark NZ 10-year bond <NZ10YT=RR> 6 basis points lower at 5.66 percent.

The NZ government's weekly bond tender was well bid, with the NZ$450 million worth of securities offered in three maturities more than three times covered. For results see [ID:nWEL000974]