New Zealand Dollar firms on USD weakness despite highest NZ jobless rate in 11 years

• NZD/USD gains 0.19% on Wednesday, supported by a broad decline in the US Dollar following the US midterm elections.
• New Zealand's Unemployment Rate rose to 5.7% in the third quarter, its highest level in 11 years.
• Stronger-than-expected US employment data reinforces expectations of another Fed rate hike in December.

NZD/USD rebounds on Wednesday, trading around 0.5620, up 0.19% on the day at the time of writing. The New Zealand Dollar (NZD) benefits from a broad weakening of the US Dollar (USD) following the US midterm elections, allowing the pair to recover despite disappointing New Zealand employment figures and expectations of further monetary tightening in the United States (US).

The US Dollar comes under pressure after Democrats secure control of both chambers of Congress, dealing a political setback to US President Donald Trump. The election results raise the prospect of legislative gridlock in Washington, as the administration will now need Democratic support to advance its fiscal and economic agenda.

This political uncertainty weighs on the Greenback, while declining US Treasury yields add to selling pressure. The US Dollar Index (DXY), which measures the currency against a basket of six major peers, falls around 0.35% on Wednesday, trading near 101.50 after reaching its lowest level since September 30 at 101.21.

However, the New Zealand Dollar faces domestic headwinds following the release of weaker-than-expected labor market figures. According to Statistics New Zealand, the unemployment rate rose to 5.7% in the third quarter, compared with 5.6% in the previous quarter and market expectations of 5.5%. This represents the highest unemployment level in 11 years. Meanwhile, Employment Change contracted 0.1% QoQ during the quarter, compared with expectations of a 0.4% increase and a 0.5% rise in the second quarter.

These disappointing figures reinforce the cautious monetary policy outlook for the Reserve Bank of New Zealand (RBNZ), which surprised markets last week by keeping interest rates unchanged. The deterioration in employment conditions could limit the central bank's ability to adopt a more restrictive stance, potentially weighing on the Kiwi despite the current weakness of the US Dollar.

On the US side, recent economic indicators continue to support expectations of further interest rate hikes by the Federal Reserve (Fed). The ADP Employment Change report showed that private-sector employers added 86K jobs in October, exceeding market forecasts of 69K. September's figure is revised slightly lower to 86K from 90K. Meanwhile, the Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) declined to 54.5 in October from 54.9 in September, slightly below expectations of 54.8. Nevertheless, the indicator remained comfortably above the 50 threshold separating expansion from contraction, suggesting continued resilience in the US services sector.

Against this backdrop, persistent inflation risks, particularly those linked to elevated energy prices amid tensions in the Middle East, continue to support expectations of additional monetary tightening. According to the CME FedWatch tool, markets assign an 81% chance to another Fed interest rate hike in December.

The divergence between the monetary policy outlooks of the Fed and the RBNZ could therefore limit the NZD/USD recovery, even as political uncertainty in Washington continues to undermine the US Dollar.

Investors now turn their attention to Thursday's US Initial Jobless Claims and Friday's Nonfarm Payrolls (NFP) report. These releases could provide further indications of the strength of the US labor market and influence expectations surrounding the Fed's next monetary policy decision.