Traders had been increasing their bets on a rate cut this year, with ANZ Bank New Zealand economists particularly strong in their support for easier monetary policy, after Australian and American central bankers were more circumspect about their own rate outlooks against a backdrop of slowing global growth.
Reserve Bank governor Adrian Orr disappointed those dovish views by maintaining a central view that the official cash rate's next move will be up, albeit in 2021 rather than the previous view of 2020.
"Talk about the market misreading the Reserve Bank," said Martin Rudings, a foreign exchange dealer at OMF. "It's a nice little relief rally, but I'm not sure it's going to go too far."
Rudings said investors appeared to be more focused on the threats to global growth, such as the strained trade relations between the US and China, whereas the Reserve Bank was more focused on the domestic economy.
"Those overseas events haven't occurred yet, but they have the potential to create a massive slowdown," he said.
The Reserve Bank's downside scenario noted a bigger global slowdown, which would warrant a 50 basis point cut in the OCR.
The two-year swap rate rose to 1.8750 per cent from 1.7950 per cent, while 10-year swaps rose to 2.4530 per cent from 2.3727 per cent.
The local currency increased to 95.96 Australian cents from 95.03 cents yesterday and climbed to 4.6186 Chinese yuan from 4.5675 yuan.
New Zealand's relationship with China is under increased scrutiny with Prime Minister Jacinda Ardern yet to finalise a visit to the country's biggest trading partner and Foreign Minister Winston Peters' tilt towards the US.
The kiwi rose to 75.70 yen from 74.45 yen yesterday and to 60.34 euro cents from 59.63 cents. It rose to 53.03 British pence from 52.29 pence.
