Why is New Zealand Dollar U.S. Dollar pair gaining today?

The New Zealand dollar held near recent highs against the U.S. dollar on Tuesday after recording its biggest one-day advance since April, as preliminary election results gave the incumbent centre-right coalition a path to remain in power, easing political uncertainty and concerns over a possible shift in monetary policy.

NZD/USD traded around 0.5636, up approximately 0.1% in the latest session, after rallying about 1.5% on Monday. The kiwi’s latest advance was its strongest single-day gain in seven months. The recovery followed a decline to around 0.5527 on Friday, its lowest level in seven months.

Preliminary results from New Zealand’s November 7 general election gave Prime Minister Christopher Luxon’s National Party and its coalition partners, ACT New Zealand and New Zealand First, a combined 67 seats in the 131-member parliament, just enough for a majority. The result offers the governing bloc a potential route to another term, although about 399,000 special votes remain uncounted and official results are not expected until November 27.

The outcome also reduces the immediate prospect of a policy change proposed by the opposition Labour Party, which pledged to restore the Reserve Bank of New Zealand’s dual mandate of price stability and maximum sustainable employment. Markets could have viewed such a change as potentially dovish for monetary policy.

The kiwi’s recovery also reflects broader weakness in the US dollar, which fell on Monday as improving risk appetite followed progress in US-Iran diplomatic efforts and global equities rebounded from last week’s technology-led selloff.

However, monetary policy remains a headwind. The RBNZ unexpectedly held its official cash rate at 2.75% in late October in a close 4-3 vote, despite markets having priced in a rate increase. Three committee members favoured a 25-basis-point hike, and the bank said tighter policy would likely be required, depending on the outlook.

Attention now turns to the US October consumer price index, due at 8:30 a.m. ET (13:30 GMT) on Tuesday. Headline inflation is expected to rise 0.3% month on month, while core prices are forecast to increase 0.2%, compared with September’s respective gains of 0.6% and 0.3%. Markets are also watching annual inflation, forecast at 3.9% for headline CPI and 2.8% for core.

Following stronger-than-expected US employment data, markets are pricing an 85% probability of a Federal Reserve rate increase in December. A hotter inflation reading could strengthen the dollar and limit further gains in NZD/USD, while softer data could extend the kiwi’s recovery.