USD weakness lifts New Zealand Dollar despite NZ jobless rate reaching an 11-year high

• NZD/USD advances 0.19% on Wednesday as broad-based US Dollar weakness after the US midterm elections lends support.
• An 11-year high of 5.7% was recorded in New Zealand's unemployment rate in the third quarter.
• Expectations of a further Fed rate hike in December strengthen after US employment figures beat forecasts.

A recovery in NZD/USD gathers support from broad US Dollar (USD) weakness following the US midterm elections, despite disappointing New Zealand jobs data and expectations of further monetary tightening in the United States (US). At the time of writing on Wednesday, the pair is trading near 0.5620, a gain of 0.19% for the day, as the New Zealand Dollar (NZD) benefits from the weaker US currency.

Democratic control of 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 necessary for the administration to push through its fiscal and economic agenda, the election outcome increases the prospect of legislative gridlock in Washington.

Lower US Treasury yields compound the selling pressure on the Greenback stemming 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 weakest reading since September 30.

At home, however, softer-than-forecast labour market data poses a challenge 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 market forecast of 5.5%. Unemployment is now at its highest level in 11 years. Employment Change, meanwhile, registered a 0.1% QoQ contraction during the quarter, against an anticipated 0.4% increase and a 0.5% rise in the second quarter.

A cautious policy outlook for the Reserve Bank of New Zealand (RBNZ) is reinforced by these weak readings, after its decision to leave interest rates unchanged last week surprised markets. Worsening employment conditions could constrain the central bank's scope to pursue a more restrictive stance. That could put pressure on the Kiwi even with the US Dollar currently on the back foot.

In the US, expectations of further Federal Reserve (Fed) interest rate increases remain supported by recent economic data. Private-sector employers created 86K jobs in October, according to the ADP Employment Change report, surpassing the market estimate of 69K. The September reading was revised down slightly from 90K to 86K. Separately, October's Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) came in at 54.5, down from September's 54.9 and marginally below the 54.8 forecast. Even so, it stayed well above the 50 mark that distinguishes expansion from contraction, pointing to continued resilience in the US services sector.

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

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

Next on investors' radar are Thursday's US Initial Jobless Claims figures and Friday's Nonfarm Payrolls (NFP) report. Further clues about the strength of the US labour market from these releases could shape expectations for the Fed's next monetary policy decision.