11-year NZ jobless high: New Zealand Dollar gains despite unemployment peak as USD weakens

• 0.19% higher on Wednesday, NZD/USD draws support from broad US Dollar weakness after the US midterm elections.
• At 5.7% in the third quarter, New Zealand's Unemployment Rate reached an 11-year high.
• Another Fed rate hike in December remains in focus as US employment data beats expectations.

NZD/USD is up 0.19% on Wednesday. The pair trades near 0.5620 at the time of writing, recovering as the New Zealand Dollar (NZD) gains support from widespread US Dollar (USD) weakness after the US midterm elections. That support outweighs disappointing New Zealand jobs data and expectations of additional monetary tightening in the United States (US).

Democrats' control of both chambers of Congress puts the US Dollar under pressure and marks a political setback for US President Donald Trump. With Democratic backing now required to progress the administration's fiscal and economic programme, the election outcome increases the risk of legislative deadlock in Washington.

Lower US Treasury yields compound the selling pressure arising from political uncertainty. On Wednesday, the US Dollar Index (DXY) is down around 0.35%, trading near 101.50. The index, which tracks the currency against six major peers, earlier touched 101.21, its weakest reading since 30 September.

Weaker-than-forecast labour market data nevertheless presents a domestic obstacle 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% market forecast. Unemployment is now at its highest in 11 years. Employment Change fell 0.1% QoQ over the quarter, against forecasts for a 0.4% gain and following a 0.5% increase in the second quarter.

A cautious policy outlook for the Reserve Bank of New Zealand (RBNZ) is reinforced by the disappointing data. Last week, the central bank unexpectedly left interest rates unchanged. Weaker employment conditions could constrain its scope to pursue a more restrictive policy, potentially putting pressure on the Kiwi even while the US Dollar remains weak.

Recent US economic releases, by contrast, continue to underpin expectations of further Federal Reserve (Fed) rate increases. In October, private-sector employers created 86K jobs, according to the ADP Employment Change report, beating the 69K market forecast. 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 September's 54.9 to 54.5 in October, just below the expected 54.8. Still, it held well above the 50 dividing line between expansion and contraction, pointing to continued resilience in US services activity.

Expectations of further monetary tightening also remain supported by persistent inflation risks. These include risks associated with high energy prices amid Middle East tensions. The CME FedWatch tool shows markets pricing an 81% probability of another Fed interest rate increase in December.

Even with Washington's political uncertainty continuing to weaken the US Dollar, differing policy prospects for the Fed and the RBNZ could cap the NZD/USD rebound.

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