Australia dollar jumps as RBA shocks with steady rates

By Wayne Cole

SYDNEY, July 8 (Reuters) - The Australian dollar bolted higher on Tuesday after the country's central bank shocked investors by not cutting interest rates as had been widely expected, slamming a dovish debt market and pushing yields higher.

The Reserve Bank of Australia ended a two-day meeting by holding its cash rate at 3.85%, confounding wagers for an easing to 3.60%. The monetary policy board voted six to three in favour of the steady outcome, a rare split, saying they wanted to see more data on inflation before moving.

Still, the board did note that the risks to inflation were more balanced and appeared to be waiting for a reading on second quarter prices due at the end of July before deciding.

"The upshot is that barring a major upside surprise in the Q2 inflation data, we still expect a cut at the Bank's next meeting in August," said Marcel Thieliant, head of Asia-Pacific economics at Capital Economics.

"That said, the risks are now tilted towards less easing than the 100bps of cuts we're forecasting over the coming twelve months."

Markets shifted to imply around an 85% chance the RBA would indeed cut to 3.60% at its Aug. 12 meeting, and now favours rates bottoming at 3.10% rather than 2.85%. 0#AUDIRPR

Three-year bond futures quickly shed 13 ticks YTTc1 as bulls were squeezed out of a crowded long trade, while 10-year bond yields jumped 9 basis points to 4.28% AU10YT=RR.

The Aussie bounced 0.8% to $0.6545 AUD=D3, having shed 0.9% on Monday as the latest U.S. tariff scare roiled markets. The currency had found support at $0.6485, while resistance is now around $0.6556.

The kiwi dollar firmed 0.3% to $0.6017 NZD=D3, after losing 0.8% overnight as risk assets recoiled. It drew support at $0.5990, but has to get back to $0.6056 to repair the damage.

The Reserve Bank of New Zealand holds its policy meeting on Wednesday and markets imply an 80% chance it will keep rates at 3.25%, given it has already cut by 225 bps. 0#NZDIRPR

Investors are looking for just one, or maybe two, more quarter-point reductions in this cycle.

"Provided there are no surprises to the RBNZ's forward indicators, this places a neutral to cautious bias on the interest rate outlook and this should be Kiwi dollar supportive," said Mieneke Perniskie, a financial markets trader at Kiwibank.

"We expect further upward momentum towards $0.6125."