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SYDNEY: The New Zealand dollar hopped to two-week highs on Wednesday as upbeat jobs data only added to the case for a further increase in interest rates, while the Australian dollar struggles with another bout of global risk aversion.

The kiwi climbed 0.6% to $0.6243, after adding 0.7% overnight to break resistance around $0.6225. The Aussie lagged at $0.6674, after failing to sustain a rally to $0.6717 overnight.

New Zealand data showed unemployment stayed low at 3.4% in the first quarter, while jobs growth of 0.8% was double market forecasts.

Wage growth also kept strong, underlining the tough task facing the Reserve Bank of New Zealand (RBNZ) in its battle to curb inflation.

“There’s plenty of heat emanating out of the labour market,” said Jarrod Kerr, chief economist at Kiwibank.

“Further wage gains are likely because the cost-of-living crisis is fuelling wage negotiations.” “The heat is expected to start coming out in the second half of 2023 - it has to, for inflation to retreat,” he added.

“The RBNZ-engineered recession, which is upon us, is likely to cause a lift in unemployment into 2024.”

Two-year swap rates jumped 8 basis points to a two-week high of 5.135% on the report. The RBNZ has already lifted rates by a thumping 500 basis points to 5.25%, and markets are almost fully priced for a move to 5.5% at the next policy meeting on May 24.

Australian data was more restrained, with retail sales up a modest 0.4% in March, leaving real sales well in the red for the first quarter, given the still fast pace of inflation.

The slowdown is much desired by the Reserve Bank of Australia (RBA) which wrongfooted markets this week by hiking rates a further quarter point to 3.85% and warned yet more might be needed to bring inflation to heel.

Australia, NZ dollars under pressure as commodities slip

A resulting sell-off in futures implies a one-in-three chance that rates could reach 4.1% before peaking.

“We continue to expect the RBA to hike rates to 4.1%, with a final +25bp rate hike in July following updates on the national accounts, unit labour costs, and the annual minimum wage decision,” said Andrew Boak, an economist at Goldman Sachs.

“We view the balance of risks as skewed to a higher terminal rate over time.”

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