MONEY MARKETS-Singapore yields rise, Aussie still hawkish

* Singapore short rates rise on central bank operations

* Aussie futures rise, still price in heavy tightening

* Dollar funding costs at a new low in Singapore

By Vidya Ranganathan

SINGAPORE, July 31 (Reuters) - A steady rise in short-term rates in Singapore dollar money markets revealed the impact of the central bank's attempts to absorb excess cash from the banking system.

Funding costs in U.S. dollars meanwhile hit a fresh low of 0.49 percent for 3-month cash in Singapore, while falling eurodollar futures EDH0 pointed to the gradual pricing in of higher market rates in 2010.

Against a backdrop of a renewed rally in Asian equity markets, interbank rates climbed further in China, another economy where the central bank has been trying to rein in lending by soaking up funds from the market.

In the yuan forward rate agreements market CNYFRA, 3-month rates with a 3-month forward start rose to 2.1 percent, levels last seen in December.

In Singapore, the swap offered rate SGDDFIX=ABSG has been climbing for more than a week, in a rare divergence from U.S. dollar markets where short-term LIBOR is still anchored by a flood of cash the Federal Reserve has supplied.

The 3-month Singapore SOR rate has risen 4 basis points to 0.607 percent in the past week.

Analysts said this was owing to the Monetary Authority of Singapore's open market operations, possibly the gradual increase in currency swaps, which could be aimed at replenishing its depleted forward book as well as at reining in domestic money supply.

"The MAS is still draining through forwards," said Woon Khien Chia, a strategist with the Royal Bank of Scotland.

"They have been putting some funds back into the market this week, but still the cumulative impact of earlier actions is there."

The MAS's forward book had net long positions of $62 billion in September last year. That was gradually wound down as the central bank, like its counterparts around the world, pumped money into financial markets besieged by the credit crisis.

In May, that forward book had expanded back up to nearly $37 billion from a trough of $26 billion in April, indicating the MAS had been swapping U.S. dollars for Singapore dollars in the spot leg to absorb some of the abundant cash supplies.

The MAS's operations are discreet and the forward positions data is released with a lag, but the rise in interbank rates suggests the central bank's forward positions would have increased further through June and July.

AUSTRALIA FUTURES RISE

In Australia and New Zealand, a day after being surprised by dovishness from the Reserve Bank of New Zealand, bank bill futures in both markets rallied although that barely caused a blip in the deeply hawkish Aussie rates markets.

New Zealand March 2010 3-month bill futures had risen to 96.83 on Friday from lows of 96.67 the previous day, extending a reaction to RBNZ Governor Alan Bollard's assessment that the economic recovery was patchy and financial conditions might have to be eased further.

At that high, the March 2010 futures contract prices 3-month rates at 3.17 percent, compared with the cash 3-month rate of 2.84 percent and policy rate of 2.5 percent.

The forward starting swaps <0#NZDFSSM> were also lower by approximately 5 basis points across the curve, with the 3-month rate priced at 3.96 percent in swaps starting after a year, 10 bps lower than on Wednesday.

Australian bank bill futures <0#YBA:> also rallied between one to 5 bps across tenors, but the move appeared more a correction after a sharp sell off since mid-July rather than a reassessment of monetary tightening expectations. For instance, the September 2010 3-month futures contract rose 2 bps to 95.04, after having fallen from a level of 95.81 on July 13.

"That rally was a drop on a hot stone. A few points won't make a difference," said a trader in Singapore. "The market is only pricing in a decent chance of a rate hike for the February meeting."

The Reserve Bank of Australia meets next week, and many analysts expect it to explicitly change its policy stance to neutral from what is currently still a dovish one.

Traders at Credit Suisse said the market still was pricing in rate rises of 118 bps in the next 12 months CSSY in Australia.

Morgan Stanley analyst Gerard Minack said his expectations of a severe recession in Australia seemed less likely, given the improvements in several sectors of the economy and in sentiment.

The implied yield on interbank futures pointed to a two-third chance of a rate rise by the end of the year and a 4 percent cash rate by the middle of next year, Minack wrote to clients. The cash rate is now at 3 percent.

"I may have been too pessimistic, but I think markets are now too optimistic," Minack said.

"They now imply a quick return to solid growth, and a quick turn to tighter RBA policy. I can't see either unfolding." (Editing by Kim Coghill)