MONEY MARKETS-NZ markets still waver on extent of rate cut

* Improving data raises doubts on New Zealand rate cut

* New Zealand swaps price in 33bps of rate cut on Thursday

* Dollar funding eases further, stress tests not a worry

By Vidya Ranganathan

SINGAPORE, April 29 (Reuters) - With hours to go before New Zealand's central bank announces a monetary policy review, money markets were still pricing in a far smaller interest rate cut than most economists are forecasting.

Economists attach a nearly 60 percent probability RBNZWATCH to the Reserve Bank of New Zealand taking its overnight cash rate down to 2.5 percent from 3 percent, when it announces a decision on Thursday.

But overnight indexed swaps NZDOIS=PYAS were quoted at 2.69 percent for one-month, implying an easing of 33 basis points.

The uncertainty over how far rates will be cut has arisen over the past month and after central bank Governor Alan Bollard tried to quell a rise in market yields driven by the view the monetary authorities were keen to preserve New Zealand's yield differentials in order to attract foreign capital.

Coming against a backdrop of some improvements in New Zealand economic data, those dovish statements from the central bank put markets in a fix.

"This is a case where the market is less confident about them going 50 than economists are," said David Plank, head of research at Deutsche Bank in Sydney.

He said there was no reason for the RBNZ to cut rates by as much as 50 basis points (bps) given the improvements in business confidence, the stabilisation in the housing market, and global data which also seemed to have stopped deteriorating.

"We think they could go 25 bps, just to underpin the market's view that there is no need for them to price rates rising anytime soon.

"A 50 bps cut uses up more of the bank's bullets at a time when they don't need to fire so many bullets," Plank said.

DOLLAR FUNDING

Meanwhile, dollar funding markets in Asia showed no sign of the anxiety over which U.S. banks might need more capital and what next week's report on the stress tests the government is conducting on the largest banks will reveal.

Even eurodollar futures were lower in Asia, back from a spike on Tuesday after reports Citigroup (C.N) would need more capital and that regulators had told Bank of America (BAC.N) it may need to raise billions of more dollars in capital. [nBNG438915]

As fears over a possible swine flu outbreak subsided, and riskier assets such as stock markets and the Aussie dollar rose, dollar swap spreads also narrowed.

December eurodollar futures EDZ9 fell to 98.73 from a 98.815 high on Tuesday, driving implied 3-month LIBOR down to 1.27 percent.

Dollar funding rates in Singapore SIUSDD=ABSG crept down to 1.0375 percent from 1.05 percent on Tuesday, inching closer to the 1 percent mark.

The spread between LIBOR LIBOR= and overnight-indexed swaps (OIS), the latter a measure of market expectation of policy rates, was steady around 84 basis points, levels last seen before the collapse of Lehman Brothers in September 2008. (Editing by Jan Dahinten)