New Zealand Dollar rises as USD weakness offsets NZ unemployment at an 11-year high

• A broad retreat in the US Dollar after the US midterm elections lifts NZD/USD by 0.19% on Wednesday.
• Third-quarter unemployment in New Zealand climbed to 5.7%, marking an 11-year high.
• Expectations of a further Fed rate rise in December strengthen after US employment figures exceed forecasts.

Disappointing New Zealand employment figures and expectations of further monetary tightening in the United States (US) have not prevented NZD/USD from recovering on Wednesday. At the time of writing, the pair trades near 0.5620, a daily gain of 0.19%. Broad US Dollar (USD) weakness following the US midterm elections is supporting the rebound in the New Zealand Dollar (NZD).

Democrats' success in securing both chambers of Congress has put the US Dollar under pressure and delivered a political setback to US President Donald Trump. With Democratic backing now required to push through the administration's fiscal and economic programme, the outcome increases the prospect of legislative gridlock in Washington.

Falling US Treasury yields are compounding the selling pressure on the Greenback arising from this political uncertainty. On Wednesday, the US Dollar Index (DXY), which tracks the currency against a basket of six major peers, is down around 0.35% near 101.50. Earlier, it touched 101.21, its lowest reading since 30 September.

At home, however, weaker-than-forecast labour market data present a headwind for the New Zealand Dollar. Statistics New Zealand reported a third-quarter unemployment rate of 5.7%, up from 5.6% in the preceding quarter and above the 5.5% expected by markets. Unemployment is now at its highest in 11 years. Employment Change, meanwhile, fell 0.1% QoQ over the quarter, against forecasts for growth of 0.4% and an increase of 0.5% in the second quarter.

Having surprised markets by leaving interest rates on hold last week, the Reserve Bank of New Zealand (RBNZ) faces a cautious monetary policy outlook, reinforced by these disappointing figures. Worsening employment conditions could constrain its scope to take a more restrictive stance. That could weigh on the Kiwi, notwithstanding the US Dollar's current weakness.

In the US, by contrast, recent economic releases continue to underpin expectations of additional interest rate increases from the Federal Reserve (Fed). Private-sector payrolls grew by 86K in October, according to the ADP Employment Change report, beating the market forecast of 69K. The September reading was revised down slightly from 90K to 86K. The Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI), meanwhile, slipped from 54.9 in September to 54.5 in October, marginally below the expected 54.8. Even so, it held comfortably above the 50 mark that divides expansion from contraction, pointing to continued resilience in US services activity.

Persistent inflation risks are also sustaining expectations of further monetary tightening, notably those associated with high energy prices amid Middle East tensions. The CME FedWatch tool puts the market-implied probability of another Fed interest rate rise in December at 81%.

Although political uncertainty in Washington continues to weigh on the US Dollar, the differing policy outlooks for the Fed and the RBNZ could thus constrain the recovery in NZD/USD.

Thursday's US Initial Jobless Claims release and Friday's Nonfarm Payrolls (NFP) report are now the focus for investors. Further evidence on US labour market strength from these reports could shape expectations for the Fed's next monetary policy decision.