Australian dollar steady as RBA holds rates, mum on guidance

By Wayne Cole

SYDNEY, Dec 9 (Reuters) - The Australian dollar was little moved on Tuesday after the country's central bank held interest rates steady as expected and cautioned that inflation risks had tilted higher, but stopped well short of flagging hikes.

The Reserve Bank of Australia wrapped up its last meeting of the year by keeping the cash rate at 3.6%, marking an extended pause since the last cut in July.

The RBA board gave a nod to inflation risks and noted domestic demand had picked up more strongly than expected, while adding it would take "a little longer" to assess the persistence of inflationary pressures.

Yet it also saw temporary factors behind some of the pickup in inflation and reasons to be careful on the monthly data.

"The board's tone was calmer than expected," said Harry Murphy Cruise, head of economic research for Oxford Economics Australia. "Explaining away part of the inflation surge suggests the board is in no rush to hike."

"But with domestic demand picking up and inflation running hotter than expected, that rules out any rate cuts next year."

Based on inflation and consumption data, markets were already wagering the next move in rates would be up.

Futures imply just a 12% chance of a hike at the RBA's next meeting on February 3, rising to around 50% by May. A quarter-point move to 3.85% is fully priced for August. 0#AUDIRPR

Still, the lack of specific talk about tightening left the Aussie idling at $0.6626 AUD=D3, having eased 0.2% overnight after failing to clear resistance around $0.6650.

Support comes at $0.6595, with the major bull target at the September top of $0.6706.

The kiwi dollar held at $0.5775 NZD=D3, after trading in a narrow $0.5760 to $0.5792 band. More support lies at $0.5700 with resistance at $0.5801.

The recent hawkish shift in Australian rates has savaged bonds, sending 10-year yields AU10YT=RR surging to a two-year peak at 4.747% over the past few weeks.

The yield premium over Treasuries has blown out to +58 basis points, from around -20 basis points in the middle of the year.

Three-year bond futures YTTc1 steadied at 95.920, having earlier hit its lowest in a year at 95.885.