SYDNEY/WELLINGTON: The Australian dollar fell sharply from three-month highs on Thursday after a weak jobs report cast doubt on market perceptions the Reserve Bank of Australia was done cutting rates.
In contrast, the New Zealand dollar powered up to a four-week high after the central bank said interest rates there will probably need to rise next year.
The Aussie dollar fell across the board, falling around one percent on the kiwi and yen.
It dived nearly a cent to a low of $0.9265, having climbed as far as $0.9355, its highest since mid-June, just minutes before the employment figures.
Australian employment suffered a surprising drop in jobs in August pushing the jobless rate up to a four-year high of 5.8 percent, an outcome that revived chances of a cut in interest rates.
Interbank futures <0#YIB:> show a 50 percent probability of a cut by Christmas, compared to just 38 percent before the jobs report. Yields on three-year government debt pulled back to 2.90 percent, and off a six-month peak of 3.0 percent.
"The market had underestimated the probability that the RBA cuts rates again and we have seen a sensible reaction in short-end yields and the Aussie dollar," said Matthew Johnson, a rate strategist at UBS.
Swap rates swung back to pricing in an easing on a 12-month horizon, albeit only of 3 basis points. Early in the week there were implying almost 10 basis points of hikes on an improved global backdrop including China, Australia's top export market.
Technicals suggest a sustained break under $0.9277 would be bearish. An important level of support is now located at $0.9180, the 38.2 percent retracement of the $0.8891/$0.9355 move.
Across the Tasman Sea, the New Zealand dollar jumped to its best level in nearly a month after a hawkish-sounding central bank explicitly acknowledged that rate hikes would likely be needed next year, given the strength of the economy.
The Reserve Bank of New Zealand (RBNZ) kept its cash rate at a record low of 2.5 percent for the 20th consecutive review, but its market forecasts and commentary were regarded as the strongest indication yet of a tightening in policy.
The kiwi jumped to $0.8149, from $0.8080 before the RBNZ statement. It later trimmed gains to $0.8115 following the soft Australian jobs data.
The RBNZ's updated view was seen as supportive of the kiwi, despite the assessment that the currency was still high and proving a headwind to the export sector.
"It's hard to go against the spirit of what the RBNZ is saying. Inflation risks are rising and interest rates will need to rise too," said ANZ chief economist Cameron Bagrie.
"We still forecast that the official cash rate will go up in early 2014 and that the process of stimulus removal will be a drawn-out affair."
A Reuters poll after the latest statement had economists firmly sticking to a first-quarter start to rate rises.
The RBNZ statement flowed through to swap rates, which were a couple of ticks higher, while short-term bank bill futures <0#NBB:> dipped as much as five ticks as investors backed the view of a rate rise by March.
Financial market pricing implies 95 basis points of tightening over the next 12 months, compared with 89 basis points before the statement. The diverging interest rate outlook between Australia and New Zealand sent the Aussie to a three-week trough at NZ$1.1375. It last stood at NZ$1.1407.
Australian government bond futures rose sharply after touching multi-week lows on Wednesday. The three-year bond contract gained 10 ticks to 97.055, while the 10-year contract added 10.5 ticks to 95.940.
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