SYDNEY: The Australian and New Zealand dollars rallied on Wednesday as surprisingly dovish comments from the Bank of Japan boosted risk sentiment and dragged the yen sharply lower.

The kiwi dollar got an added lift from jobs data that were not as dire as bears had wagered on, leading markets to scale back the chance of an imminent rate cut.

The main action came after BOJ Deputy Governor Shinichi Uchida said the central bank would not raise interest rates when financial markets were unstable.

That was a marked turn from last week when the BOJ hiked rates by 15 basis points and flagged more tightening ahead.

Markets reacted by paring the probability of a rate rise in October to just 25%, while pushing Japanese shares back into the black.

The Aussie jumped 1.9% on the yen to 95.84, taking it away from Monday’s 14-month low of 90.35.

The kiwi climbed a hefty 2.4% to hit 87.95 yen.

That in turn helped the Aussie edge up 0.4% on the US dollar to $0.6543, and well away from Monday’s trough of $0.6349.

The kiwi gained 0.9% to $0.6007, aided by the latest jobs report.

While unemployment in New Zealand did tick up to 4.6% in the second quarter, markets had been braced for 4.7% or much higher.

Employment also rose by 0.4%, when analysts had looked for a drop of 0.2%.

“The labour market has continued to soften in broadly the manner that the Reserve Bank was expecting,” said Michael Gordon, an economist at Westpac.

“That in itself is likely to be a disappointment for financial markets, which we suspect were looking for a result that would validate their pricing for a rate cut at next week’s policy meeting.”

Australia, NZ dollars struggle amid flight to safety; bonds rally

The Reserve Bank of New Zealand (RBNZ) meets on Aug. 14 and most analysts expect it to hold rates steady at 5.5%, though it has signalled a more dovish outlook ahead.

September bill futures fell a steep 15 ticks after the data to stand at 94.73, while two-year swap rates jumped 11 basis points to 4.11%.

The Reserve Bank of Australia (RBA) remains a lot more hawkish, having pushed back aggressively on market pricing for near-term rate cuts.

Swaps now imply a 48% chance of an easing in November, compared to 88% before the RBA’s policy meeting on Tuesday.

Markets have priced in 82 basis points of cuts to the end of 2025, against 197 basis points in New Zealand.