MONEY MARKETS-Australian rate hike bets linger despite weak data

HONG KONG, Nov 4 - Australian swap markets showed there were still some chance of an interest rate rise in December even after data released on Wednesday showed a decline in retail sales which according to some was expected by the central bank.

Dollar funding rates in the region were steady and off recent lows amid some caution ahead of the U.S. Federal Reserve's statement after its two-day rate-setting meeting.

Although the Fed is expected to reaffirm that policies supportive of the economy will stay in place for some time, there were concerns about lending money until the official announcement.

In Singapore, 3-month dollars were unchanged at 0.28714 percent, off last week's record low of 0.2843 percent.

"It's a lot more due to the market just tilting its bias towards the possibility of the Fed being a lot more concerned over excess liquidity and that it may alter its tone of language on the word 'extended period'," said Suresh Ramanathan, strategist with CIMB Investment Bank.

Rates in Asia did not follow interbank markets in the United States and Europe overnight.

The low-rate expectations, together with a banking system awash in cash, sent the benchmark three-month London interbank offered rate for dollars to a record low of 0.27813 percent.

The Fed is not expected to soften its commitment to hold benchmark interest rates exceptionally low for "an extended period" but some like Izuru Kato, chief economist at Totan Research, see a chance of a change in the near future.

Eurodollar futures were marginally lower, with December eurodollar futures pricing 3-month LIBOR at 0.325 percent.

In Australia, retail sales fell unexpectedly in September but that did not prevent interest rate swaps from rising as they clawed back after Tuesday's fall.

On Wednesday, the one-year swap rate rose 6 basis points (bps) to 4.57 percent and the the OIS rate for one year was marginally higher at 4.3775 percent.

Swap rates are also rebounding after registering a fall of 13-15 bps for the one-year contract on Tuesday.

"Overall, we still think there's a decent chance they will hike in December and I'm not sure that these numbers are that much of a surprise," said Su-Lin Ong, a senior economist at RBC.

Ong said the Reserve Bank of Australia (RBA) had fully expected consumer demand to fade somewhat once the fiscal boost had passed.

Still, the market's bets for a rate increase have fallen since the start of the week. The RBA lifted its cash rate by 25 basis points to 3.5 percent on Tuesday.

Interbank futures are implying a one-month rate of 3.64 percent for December, while a measure from Credit Suisse showed a 50-50 chance of a hike.

But earlier this week, the market had been fully priced for a rise to 3.75 percent next month.