New Zealand Dollar rebounds after sharp US employment disappointment

• NZD/USD advances on Friday, supported by broad US Dollar weakness after job creation fell well short of expectations.
• Downward revisions to previous months and slower wage growth reinforce signs of weakness in the US labor market.
• A tightening election race in New Zealand ahead of the November 7 vote fuels political uncertainty and limits the Kiwi’s gains.

NZD/USD advances on Friday and trades around 0.5610 at the time of writing, up 0.12% on the day. The New Zealand Dollar (NZD) benefits mainly from the decline in the US Dollar (USD), which comes under pressure following a significantly weaker-than-expected employment report. However, concerns surrounding the New Zealand election limit the Kiwi’s bullish momentum.

The United States (US) Bureau of Labor Statistics (BLS) reported on Friday that Nonfarm Payrolls (NFP) increased by only 29K in September, well below market expectations of 90K. Revisions to previous months further highlight the weakness of the report. August job creation was revised down to 133K from the 162K initially reported, while July now shows a decline of 10K jobs compared with a previously estimated increase of 21K. Overall, employment gains in July and August were revised down by a combined 60K.

Other components of the report also offer little support to the Greenback. The Unemployment Rate edged higher to 4.2%, while the Labor Force Participation Rate rose to 61.8% from 61.6% previously. Meanwhile, Average Hourly Earnings increased 3% YoY, below the 3.2% expected, easing concerns over wage-driven inflationary pressures.

The US Dollar reacts negatively to the release. The US Dollar Index (DXY), which measures the value of the Greenback against a basket of six major currencies, falls by 0.11% on Friday to trade near 101.90 at the time of press.

The employment report also triggered an adjustment in expectations surrounding the Federal Reserve’s (Fed) next monetary policy decision. According to the CME FedWatch tool, markets now assign around a 22% chance to an interest rate hike in October, down from roughly 64% a week earlier.

This shift follows another batch of softer US economic data. Thursday’s weaker-than-expected Personal Consumption Expenditures (PCE) inflation figures had already reduced expectations of further monetary tightening in October. Friday’s labor market weakness adds to signs that the US economy is losing momentum, further reducing the case for an immediate rate hike. Markets nevertheless retain an approximately 67% chance of a rate increase in December, according to the CME FedWatch tool.

On the New Zealand side, political uncertainty acts as a headwind for the NZD. Ahead of the November 7 election, opinion polls indicate a tight race and the possibility that New Zealand Prime Minister Christopher Luxon’s coalition could lose power. A change in government could result in several shifts in economic policy, including changes to the central bank’s mandate.

New Zealand’s Labour Party has indicated that it would restore the dual mandate of the Reserve Bank of New Zealand (RBNZ), after Christopher Luxon’s government refocused its mandate on price stability. The prospect of changes to the monetary policy framework therefore adds another source of uncertainty for the New Zealand Dollar ahead of the election.