Analysts at Westpac explained that the RBA Board meeting should provide little surprises, with Tuesday’s speech by Governor Lowe and Friday’s Statement on Monetary Policy (SoMP) more important from a market perspective. 

Key Quotes:

“We expect a lower growth forecast in the SoMP, but no shift in the inflation forecasts.”

“That will reinforce the current view that policy is on hold for the foreseeable future, although considering that a full hike is not expected until May 2019, risk rewards may be slightly biased toward a more hawkish interpretation of the RBA.”

“The AU-US 10yr bond spread has traded as we would expect. That is, AU bonds have outperformed during the UST-led sell-off. The spread is back around the -14/15bp level, which is where we see it averaging over the next several months, with any widening impulses being quickly faded.”

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The Aussie racks up another day of losses as the US Dollar continues to climb.
RBA rate meeting up next, dovish statement on the cards.

The AUD/USD is trading near the bottom heading into Tuesday’s markets, sticking to 0.7530.

The Aussie geared up to begin staging a recovery on Friday. but got slapped back down in Monday’s trading, extending April’s decline into new four-month lows.

AUD/USD analysis: RBA monetary policy meeting coming up next

The AUD will be seeing the AiG Manufacturing Index at 23:30 GMT Monday (prev. 63.1) before the Reserve Bank of Australia’s (RBA) latest Rate Statement at 04:30 GMT Tuesday. The RBA is already projected to remain stuck on interest rates well into 2019, but traders will be looking to see just how much the central bank will be lowering their forward-looking growth expectations.

A weakening Aussie has been the general theme amidst souring economic data and a widening interest rate differential, with many expecting the AUD to continue dropping against the Greenback into the lower 0.70s.

AUD/USD levels to watch

FXStreet’s Chief Analyst Valeria Bednarik on the Aussie’s near-term outlook: “latest data coming from the country has been soft, which suggest that if there’s going to be a change in the wording, it would be to the dovish side, and could result in the pair piercing the 0.7500 threshold. Technically, the pair is bearish, given that in the 4 hours chart, the pair keeps developing below a bearish 20 SMA, while the RSI indicator extended its decline down to 31, although the Momentum retains a neutral stance.”

Support levels: 0.7500 0.7470 0.7430

Resistance levels: 0.7550 0.7590 0.7620       

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Analysts at Westpac offered a market wrap.

Key Quotes:

“The US dollar resumed its recent rally, rising against all G10 currencies though without fresh yield support. ”

“European equities mostly followed Asia’s upbeat lead and US stocks opened higher but ground lower over the day, the S&P 500 closing on its lows. Crude oil prices seemed to be supported by Israeli PM Netanyahu’s presentation claiming Iran is secretly reneging on the nuclear deal.

EUR/USD fell 0.5% to 1.2075, with German retail sales data disappointing and concern over Italy’s struggle to form a coalition government. GBP/USD did better, bouncing off 1.3715 to trim its daily loss to -0.2%. USD/JPY was choppy at times but overall 25 pips higher at 109.30 early Sydney.

AUD/USD extended its Sydney afternoon decline to about half a cent over the day, touching a low of 0.7525 in the NY afternoon, its weakest point since the December 2017 lows around 0.7500. NZD posted a very similar decline, to 0.7034 – a four-month low. AUD/NZD thus remained range-bound on either side of 1.0700.

US personal income and spending in March rose 0.3% and 0.4%, slightly below expectations with Feb revised lower. The core PCE deflator (Fed’s inflation target) rose by 0.2% in March, for a 1.9% annual gain, right in line with consensus. The Chicago purchasing managers index was strong once again in April, at 57.6.

The US 10yr treasury yield fell 1-2 basis points to 2.96%, while 2yr yields were unchanged around 2.49%. Fed fund futures yields price in 2 more rate hikes this year, with a chance of a third (for 4 in total).”

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The Core Personal Consumption Expenditures over to year to March came in line at 1.9% matching consensus, almost at 2% Fed’s target.
Higher US dollar and increasing tensions in the Middle-East are not helping stocks gaining traction amid stellar earnings season.

The S&P 500 lost 8 points or 0.3% to 2,648.05 and ten of the eleven main sectors ended lower; T-Mobile will buy Sprint for $35.5 billion, however, analysts believe that the merger will have issues with federal approvals and both companies stocks fell sharply.The Dow Jones Industrial Average dropped 0.61% to 24163.15 led by Boeing while Apple is due to report its earnings after the close on Tuesday. The Nasdaq lost 0.75% to 7066.27 led by a decline in Microsoft. 

Although earnings are stellar, the markets are struggling with higher rates and a stronger US dollar which had its best month (April) since November 2016.

On the macroeconomic front, the Personal Consumption Expenditures (PCE) price index printed in March its biggest year-on-year gain since February 2017. The core PCE, which excludes food and energy, rose to 1.9% in line with analysts expectation. The core PCE is the Federal Reserve’s preferred gauge of inflation and its target is set at 2%. According to analysts at NatWest Bank, the question is not whether the Fed raise three or four times in 2018 but what will happen in 2019. 

On the geopolitical front oil got an intraday boost as Israel said that Iran was developing nuclear weapons in a secret location. Netanyahu revealed top-secret Iranian documents which have been confirmed by US authorities. The news comes less than two weeks before US President Trump must decide whether to pull out of the Iranian deal. Increasing tensions in the Middle East usually do not bode well for stocks. 

S&P 500 daily chart

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NZD/USD: more downside to follow from here, eye son 0.6880?
NZD/USD: reflations trade at risk, commodities under pressure.

NZD/USD NZD/USD has been hurt on dollar strength as the reflation trade comes under pressure once again, and if was not for the price of oil on the Iran risk, the commodity FX could well have been under further pressure, bringing in the 70 cents levels into vogue for Kiwi traders. Currently, NZD/USD is trading at 0.7035, down -0.70% on the day, having posted a daily high at 0.7091 and low at 0.7034.

Fundamental/political wrap: reflation trade under pressure, dollar goes bid

NZD/USD opened around 0.7055 after pair lost its footing early on in the European shift and bears stayed on top as NY got going with a strong dollar. Then, risk soured and stocks dropped, (after an initial bullish gap on McDonald’s revenue and profit report), making for a new trend low to 0.7033 as the yen picks up a strong bid, sending NZD/JPY lower and weighing on the Kiwi. 

What are Bank analysts saying?

“With US inflation on track to justify further Fed tightening, equity markets are wobbling and the USD is finding more support, and a key level in the Dollar Index (200-day moving average) is fast approaching. That has put the NZD back on the defensive, and a move back below 70 cents is now easily on the cards,” explained analysts at ANZ.

NZD/USD levels

Despite last week’s closing bull hammer on the daily sticks, technically, there is a bearish bias now that a new low has been set accompanied with the RSIs biased to the downside as well. Support is at 0.6880 and resistance is at 0.7180.

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Analysts at ANZ explained that reflecting on the recent run of solid US data, they expect the FOMC statement on Wednesday to reflect continuing confidence in the Fed’s assessment of solid growth, full employment and normalising inflation. 

Key Quotes:

“Monetary policy has been successful recently in guiding the economy to the Fed’s statutory objectives and there is no reason to expect a departure from current guidance.”

“We continue to look for a 25 bps rise in the IOER to 2.0% in June and fundamentals point to a resumption of the upwards trend towards higher bond yields soon.”

“That said, markets will continue to have an eye on US-EU metal tariffs and Chinese-US trade talks so some defensive positioning may continue in the short term.”

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Analysts at ANZ offered a snapshot look at the markets.

Key Quotes:

“Despite what can best be described as encouraging US data, bonds rallied overnight in what appears, more than anything, to be a positioning-related move, with talk of record speculative shorts in US Treasuries at present.”

“That said, gains were being paired at the time of writing, with the 10-year yield currently down 1bp to 2.95%. European equity markets had a reasonable start to the week, with the DAX up 0.3%, the CAC 40 up 0.7% and the FTSE 100 up 0.1%.”

“Conversely, US equities pulled back after a strong open, with the S&P 500 down 0.5% and the NASDAQ down 0.6%, with pharmaceutical, tech and telecommunications stocks weighing.”

“Oil rose, in part due to Israeli allegations of a secret Iranian nuclear programme, with WTI lifting to $68.50/bbl. Gold fell 0.5%.”

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From a fundamental and political perspective, we have sand storms kicking up again in the Middle East, this time with Israeli PM Netanyahu who has said he will reveal Iran’s ‘secret nuclear files’.

They may be possible propaganda in a joint effort between the US and Isreal to sway Macron and Merkel away from the Iran nuclear deal, (The Joint Comprehensive Plan of Action), an agreement reached in Vienna on 14 July 2015 between Iran, the P5+1 plus Germany and the European Union. This comes just before Trump’s ‘deadline’ on Iranian sanctions on the 12th May. This sent oil higher as the market braces for sanctions on Iranian oil again. 

UPDATE: US Official confirms authenticity information provided by Israel

Meanwhile, as traders keep ears to the ground for further ME headlines, heading northeast, the economic backdrop in Europe is concerning. The data there has been leading to growing doubt over the consensus of a synchronized global growth theme and the reflation trade is back under pressure. The dollar is higher and commodities are looking vulnerable, (oil is propping up the complex, for now).

Key headlines (source LiveSquawk):

Israeli PM Netanyahu accuses Iran of cheating on agreement
Oil jumps as Netanyahu warns on Iran nuclear weapons
US pres. Trump: nixing Iran nuclear deal would not hurt n.Korea talks
US Tsy Sec. Mnuchin:  Trump yet to decide on metals tariff exemptions
Canadian PM Trudeau: us tariffs on steel, aluminum a ‘very bad idea’
US seen issuing $75 bln in net marketable debt in Q2, down $101 bln from prev
EU trade chief makes final bid to ward off us tariffs
EU’s Barnier warns of no Brexit deal without border backstop
Scottish labour, Lib Dems reject Brexit powers offer
Italy coalition talks foundering, five star floats idea of another election

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EUR/USD starts the week on the back foot as Eurozone data keeps disappointing while US inflation came in-line with forecast.
The EUR/USD bears want to keep the pair below the 1.2100 handle and a hawkish FOMC on Wednesday would likely send the pair past the 1.2000 level.

EUR/USD is trading at around 1.2076 down 0.45% as the New-York forex session is slowly coming to an end. 

The EUR/USD started the week on the back foot as the German Harmonized Index of Consumer Prices year-on-year to April decelerated to 1.4% versus the 1.5% expected by analysts. On the other hand, tier-one inflation data from the United States came in-line with market’s forecast. The Core Personal Consumption Expenditure price index came in at 1.9% matching consensus. The status quo is maintained with the pattern of disappointing macroeconomic data from the Eurozone and relatively good data from the US. 

Earlier in the session the Chicago Purchasing Managers Index, Pending Home Sales and the Dallas Fed Manufacturing Business Index for April all came below expectations. However, these are not game changers and the market is shifting its attention to the FOMC meeting on Wednesday. Investors will gauge if whether or not a rate hike is coming in June. If the Fed expresses doubts blaming market conditions and rising yields to delay rates, then market participants might dump the US dollar. On the other hand, if the Fed is upbeat on the economy and telegraph that they have the intention to pull the trigger in June, the greenback will most likely continue its bull trend. The US Dollar Index (DXY) is trading at 3.5-month highs. It is also worth mentioning that the US data is not impacting the USD as much as in the last weeks as market participants will now need the widely awaited confirmation of a rate hike in June on Wednesday’s FOMC.

Coming up on Tuesday is the US Manufacturing Purchasing Managers Indexes from both, Markit and ISM. However, there is no data coming from the Eurozone as the market will be closed due to Labour Day. However, UK stock markets will be open.

EUR/USD daily chart

The medium-term trend is bearish. Immediate support is seen at 1.2054 (Friday’s low), followed by the 1.2000 figure and next at 1.1915 swing low. On the other hand, resistances are priced in at 1.2100 figure, 1.2130 (Friday’s high) and 1.2200 figure. 

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