The local currency last Friday has hit its lowest level against its New Zealand counterpart since June 2017, as the kiwi strengthens.
The New Zealand currency took off on Wednesday when the central bank surprised bears by being more balanced on the economic and policy outlook than many had expected.
At 1256 AEDT on Friday the Aussie was buying NZ$1.0398, down 1.1 per cent for the week.
It dipped under NZ$1.04 late on Thursday for the first time since late June, 2017.
Speculators this week had shorted the kiwi heavily in anticipation the Reserve Bank of New Zealand would turn ultra-dovish given a run of softer data at home and evidence of a slowdown globally.
Instead, RBNZ Governor Adrian Orr said the risks of a cut in interest rates had not increased recently, causing a sharp rise in bond yields as the market backed away from pricing in an easing, if only for now.
Yields on two-year paper shot back up to 1.725 per cent having hit historic lows at 1.61 per cent early in the week, leaving them more in line with the 1.75 per cent cash rate.
“While the Bank pushed out the timing of future rate hikes, the risks around the outlook were ‘symmetric’, up and down,” said Jarrod Kerr, chief economist at Kiwibank.
“Market participants had positioned for a significant shift in the RBNZ’s bias. Without the delivery of an explicit easing bias, the kiwi shot higher.”
The Aussie dollar trailed behind at US$0.7089, almost unchanged for the week but off the recent five-week low of US$0.7054.
It had popped higher overnight when the US dollar was hit by a dismal retail sales report, but failed to clear resistance at US$0.7136.
US sales suffered their sharpest drop since 2009 in December, a shock result that seemed to justify the Federal Reserve’s decision to pause on rate hikes.
Yet the recent run of Australian data has not been particularly upbeat and investors continue to price in a better-than 70 per cent chance of a cut in interest rates by year end.
Indeed, a top official from the Reserve Bank of Australia (RBA) on Friday welcomed the Aussie’s decline given there was still slack in the labour market and inflation remained uncomfortably low.
Data due next week is expected to show wage growth stayed at a miserly 2.3 per cent in the December quarter even as the labour market performed strongly.
Labour data for January is out on Thursday and analysts forecast the unemployment rate would hold at a 6-1/2 year low of 5.0 per cent with around a net 15,000 jobs created.
At the end of next week, RBA Governor Philip Lowe appears before parliament for his semi-annual testimony and markets will be sensitive to any hint of dovishness.
Australian government bond futures followed Treasuries higher in the wake of the poor US data.
The three-year bond contract added 2.5 ticks to 98.340, while the 10-year contract rose 4 ticks to 97.8950.
Access exclusive analysis, locked news and reports with Inside Retail Weekly. Subscribe today and get our premium print publication delivered to your door every week.