The New Zealand dollar surged on Wednesday after the country's central bank sounded less dovish on policy than speculators had wagered on, forcing a round of heavy short covering.
The kiwi NZD=D3 shot up 1.1 percent to $0.6811 as a result, recovering a week's worth of losses.
It had been sliding since an unexpectedly muted jobs report kindled intense speculation the Reserve Bank of New Zealand (RBNZ) would turn super dovish at its first policy meeting of the year.
The central bank did say that the next move in interest rates could be down as well as up, moving back to a more neutral stance.
The bank reiterated that it expected to keep the official cash rate (OCR) at 1.75 percent through 2019 and 2020, but bears had bet it would push that out to include 2021 as well.
Indeed, the bank's long-term projections still showed the next move would likely be up, with 1.97 percent pencilled in for June 2021 and 2.36 per cent for March 2022.
"Markets interpreted the statement as hawkish," said Imre Speizer, head of NZ strategy at Westpac. "While we expected that developments would have necessitated a removal of hikes from the OCR forecast at the 2020-2021 horizon, the actual shift was modest."
Yields on two-year government debt NZ2YT=RR duly climbed to 1.675 percent, from 1.62 percent, and rates on swaps jumped 7 basis points to 1.89 percent.
"The magnitude of these reactions seems excessive relative to the magnitude of surprise, and we wouldn't expect them to extend much further," added Speizer.
The rally in the kiwi spilled over into the Australian dollar AUD=D3 which edged up to $0.7112, from an early $0.7089.
The Aussie had also taken a beating in the past week after the Reserve Bank of Australia (RBA) had stepped back from a long-held tightening bias and conceded the next move in rates could be down as well as up.
The RBA got some better news on Wednesday when a survey of consumer confidence showed a surprisingly strong comeback in February, after a dismal start to the year.
The Melbourne Institute and Westpac Bank WBC.AX index of consumer sentiment jumped 4.3 percent in February, from January when it slid 4.7 percent.
Australian government bond futures eased, with the three-year bond contract YTTc1 off 2.5 ticks at 98.325. The 10-year contract YTCc1 also fell 2.5 ticks to 97.8600.
