MONEY MARKETS-NZ rates fall after RBNZ despite doubts

* New Zealand swaps fall, futures rise after RBNZ statement

* Markets not entirely convinced RBNZ can stick to low rates

* Dollar funding costs at a new low in Singapore

By Vidya Ranganathan

SINGAPORE, July 30 (Reuters) - Unexpected dovishness from New Zealand's central bank pushed down rates on Thursday even though some yields slavishly followed the uptrend in Aussie markets as a majority of investors remained convinced policy rates will not fall further.

Coming after the Reserve Bank of Australia's upbeat assessment of its economy, the Reserve Bank of New Zealand's statement caught some market players off guard.

RBNZ Governor Alan Bollard said the economic recovery was patchy and financial conditions might have to be eased further. He also said the strong currency was posing a risk to the economy.

New Zealand interest rate swaps NZDIRS fell sharply after the review, where rates were kept steady at 2.5 percent. The 2-year swap, which had risen to 4.07 percent before the statement on views the RBNZ would follow the lead of the RBA, fell to 3.9 percent.

The overnight indexed swaps market NZDOIS=ICAP, which is a reflection of policy rate expectations, fell 2-5 basis points across the curve. One-year OIS was at 2.72 percent.

"Even after today's unmistakeably dovish comments from Bollard the New Zealand OIS curve continues to imply 83 bps of rate hikes, not cuts, over the next 12 months," said Sean Keane, a director of Triple T Consulting and formerly a money markets strategist at Credit Suisse, in a note to clients.

"He is doing his very best to jawbone the Kiwi lower and adding the threat of further rate cuts into the mix in an effort to shift fast-money investor focus elsewhere."

Imre Speizer, a senior markets strategist with Westpac Bank, said the drop in yields showed at least some market participants were beginning to believe Bollard's pledge to keep rates low for a long time.

"There's still disbelief in the market but you can say at least that more in the market now believe that rates will stay low for long and might even go lower," he said.

"If Bollard follows it up with more talk, I would say that you might get that camp growing a bit but you can never get everyone jump onto that camp because the data tells the other story," Speizer said, citing housing, consumer and business confidence and other indicators of steady improvement in the New Zealand economy.

Thursday's statement from Bollard was clearly aimed at talking down the currency NZD=, he said.

Bank bill futures also jumped, with the March 2010 3-month futures pricing yields at 3.19 percent compared with 3.33 early in the day.

But the forward starting swaps <0#NZDFSSM> barely moved, staying almost as steep between the one- and 3-year tenors as swaps in Australia, where yields rose on Thursday after data showed a big rise in building approvals in June. The 3-month Aussie OIS is at 3.01 percent and is up 7 bps in 10 days.

New Zealand one-year swaps starting after one year were quoted at 4.9 percent, a significant premium over the policy rate and 3-month bank bill rate at 2.83 percent.

Keane said there was incredible benefit in receiving that swap for those willing to take Bollard at his word.

Analysts at RBC Capital Markets said it was doubtful the RBNZ will be able to exercise its dovish bias and cut rates because of the risk that rates in neighbouring Australia will start rising sooner.

"We expect plenty of jawboning in the months ahead and a prolonged period of steady cash rates but not further cuts,' RBC said.

RBC said it was considering bringing forward its forecast for Australia's first rate rise to the first half of 2010 from the latter half, and therefore possibly the timing of the start of RBNZ's tightening cycle to the second quarter from current estimates of the fourth quarter.

Elsewhere, dollar funding costs in Asia trickled lower to fresh lows. In Singapore, 3-month dollars SIUSDD=ABSG fell to 0.49857 percent, a record low. (Editing by Kazunori Takada)