Australia dollar holds ground as RBA delivers 'hawkish' rate cut

By Wayne Cole

SYDNEY, Feb 18 (Reuters) - The Australian dollar held its ground on Tuesday after the country's central bank delivered the first cut in interest rates in more than four years but flagged that any further easing would be gradual.

The Reserve Bank of Australia matched market expectations by lowering its cash rate by 25 basis points to 4.10%, citing a slowdown in core inflation toward its target band of 2-3%.

Yet policy makers also said they were "cautious" about the prospects for more policy easing in case the process of disinflation stalled.

"It's worth noting that the Board struck a number of hawkish notes in its policy statement," said Abhijit Surya, a senior economist at Capital Economics.

"All told, we're sticking to our view that the ongoing easing cycle will prove short-lived, and we're forecasting a terminal cash rate of 3.60%, which is in line with the analyst consensus."

Markets had already implied only a slim chance of a cut at the next meeting in April, rising to above 50% for a May move. The cycle is expected to be relatively shallow with rates bottoming at 3.60% by September. 0#AUDIRPR

Bond markets had long priced in the easing so three-year futures YTTc1 were barely changed at 96.140, while 10-year yields AU10YT=RR edged up 2 basis points to 4.469.

The Aussie was a fraction lower at $0.6348 AUD=D3, having hit a two-month high at $0.6374 overnight. The next major chart barrier is the 10--day moving average at $0.6428, while support lies around $0.6330 and $0.6230.

The kiwi dollar slipped 0.5% to $0.5708 NZD=D3, after also reaching a two-month top of $0.5750 on Monday. The Reserve Bank of New Zealand is widely expected to slash its rates by 50 basis points to 3.75% on Wednesday.

It was a marked turnaround for the Aussie which just a couple of weeks ago was wallowing at a five-year trough of $0.6085 as the threat of U.S. tariffs dimmed the global outlook.

Subsequent delays to those tariffs helped the trade-exposed currency rebound, though the threat has really only been postponed for a month or two.

"While U.S. tariffs on China would highly likely hit Australian economic activity, we believe the market has excessively discounted the Aussie," argued analysts at Nomura.

They noted the Aussie was historically weak compared to copper prices, which climbed to three-month highs last week. Copper is a major Australian export and also a bellwether for industrial activity globally, pointing to firmer demand for commodities.