New Zealand Dollar Aims Higher but U.S. Vote, RBNZ Decision Key to Outlook

- NZD outperforms with risk assets as Americans head to polls.
- Voting begins, U.S. election dominates ahead of NZ jobs data.
- USD response, RBNZ policy key to NZD's short-term outlook.

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• GBP/NZD spot rate at time of writing: 1.9464
• Bank transfer rate (indicative guide): 1.8783-1.8919
• FX specialist providers (indicative guide): 1.9172-1.9289
• More information on FX specialist rates here

The New Zealand Dollar rose Tuesday as investors chased risk assets in anticipation of a clean victory for the Democratic Party in Tuesday's presidential election, which is as pivotal for the outlook as the looming Kiwi jobs report and next week's Reserve Bank of New Zealand (RBNZ) policy decision. 

New Zealand's Dollar advances on major currencies including the Dollar and Pound as polling stations opened in the U.S. and investors stood firm behind wagers implying that a Democratic Party 'clean sweep' of both houses of Congress and the White House is the most likely outcome from the vote. 

"The outcome of that event will dictate near term NZD/USD direction, with NZ labour data likely taking a back seat," says Imre Speizer, head of NZ strategy at Westpac. "We maintain a positive outlook, targeting 0.6800 by year end, expecting the USD to weaken amid elevated risk sentiment."

Pollster and analysts alike generally consider Democrat candidate Joe Biden as a shoo-in for the presidency, while investors have wagered heavily that President Donald Trump will be ousted from the White House once Americans have cast there votes. 

Markets may face a tense, days-long wait before the actual result is confirmed although individual states will begin to declare theirs during the early hours of Wednesday morning and in the wage of New Zealand's third-quarter jobs report, which is expected to reveal a sharp rise in unemployment. 

"Weakening New Zealand labour market conditions will reinforce expectations for additional RBNZ easing next year and curtail NZD/USD strength. Our ASB colleagues project New Zealand’s unemployment rate to lift to 5.5% in Q3 (consensus: 5.3%) from 4.0% the previous quarter," says Elias Haddad, a strategist at Commonwealth Bank of Australia. "US election uncertainty and the likelihood of a more pronounced setback to the global economic recovery will continue to underpin a firmer USD in the near‑term."

Above: NZD/USD shown at daily intervals with S&P 500 index futures (yellow line, left axis).

Consensus looks for New Zealand's unemployment rate to have risen from 4% to 5.3% last quarter, which analysts and economists see emphasising to the RBNZ an economic need for ongoing intensive monetary support. The RBNZ will announce its next policy decision on Wednesday 11 November and has already prepped markets to expect the cash rate to be cut below zero next year, but whether the Kiwi retains its upward bias will be determined most in the short-term by the U.S. election.

"Markets will likely go back to look at those figures once the US election-related dust has settled," says Francesco Pesole, a strategist at ING. "While the NZD is set to be another beneficiary of a potential large victory by Joe Biden (and one of the main losers if Trump wins), short-term overvaluation (according to our fair value model) and an overstretched net-long positioning suggest a somewhat less upside potential compared to its closest peer AUD." 

The RBNZ's trigger-happy approach to interest rate cuts and quantitative easing has kept NZD/USD pinned below 0.68 since the beginning of its recovery rally in March, while the market's bearish outlook on the U.S. Dollar has kept the Kiwi supported above 0.65, making for months of range-bound trading.

"NZD volatility is also likely to stay elevated this week as the RBA and US election outcomes weigh on the NZD. A Biden victory could provide modest support to the NZD if risk sentiment improves," says Nikolaos Sgouropoulos, a strategist at Barclays. 

This election outcome will be the difference between whether the U.S. Dollar continues a six-month decline or rips higher as short-sellers are squeezed either by a surprise re-election of President Donald Trump, or an outcome that remains too close to call for the length of time it takes an unprecedented number of postal votes to be counted. 

"It's entirely possible that Donald Trump will be re-elected today, but it is not very likely," says Ian Shepherdson, chief economist at Pantheon Macroeconomics. "Our base case for some time has been a blue sweep, with Mr. Biden winning comfortably, the Democrats holding 50-to-52 Senate seats and maintaining, at least, their hefty majority in the House. Yesterday, the non-partisan Cook Report's final House ratings suggest that the Democrats will increase their majority by 10- to-15 seats. Under the current rules, Democrats would not have enough votes in the Senate to pass budgetary legislation which increases spending but does not increase revenues, without Republican support." 

Above: NZD/USD shown at daily intervals with S&P 500 index futures (yellow line, left axis).

"NZD/GBP is technically neutral and well within very established ranges," says David Croy, a strategist at ANZ.

Anything other than a decisive victory for the opposition candidate could make a contested election more likely, speculation suggests, while President Trump has only encouraged this view by continuing to make allegations of foul play relating to the system for postal voting. He criticised at the weekend a Supreme Court decision to allow ballots that are post-marked on election day to be counted days after the actual vote in Pennsylvania, alleging this could facilitate cheating by opposition activists.

"The NZD has been surprisingly resilient, in our view, given the deteriorating macro backdrop as COVID19 spreads through Europe and the US, as risk appetite has taken on a more cautious tone ahead of the US election," says Ray Attrill, head of FX strategy at NAB. "We could imagine some NZD volatility ahead, with the NZD running softer into the US election, bouncing higher on any USD sell-off post-election, and then weakening again as the RBNZ’s statement provides little reason for traders to be long NZD."

Investors may have underestimated the probability of a marginal Biden victory that is subsequently challenged in the courts, leading to weeks of uncertainty, and have given short-shrift to the idea that President Trump could be re-elected. Both outcomes could force investors to walk away from, or at least reduce bets against the Dollar, which would lift the greenback and weigh on exchange rates like NZD/USD. 

The Kiwi is among the major currencies with the most to lose from a re-election of Donald Trump given New Zealand's close links with a Chinese economy that could be subjected to continued or even new U.S. tariffs during a second Trump presidency. The prospect of a continued trade war between the world's two largest economies would lift the safe-haven Dollar and by implication, weigh on commodity currencies like the Kiwi. 

"A Dem clean sweep should result in a relief rally in risk, but the focus will quickly turn to the growth impact from the current second wave and possibly more importantly, how aggressively Biden pursues his well-publicised corporate tax hikes, therefore I am not sure how long the relief rally will last," says a trader on the London dealing desk at J.P. Morgan in Tuesday morning remarks. "A Trump win and we just buy USDs."

Above: NZD/USD shown at daily intervals with U.S. Dollar Index (yellow line, left axis).