Analysts at Nomura offered a preview of the forthcoming key US data today.

Key Quotes:

“ADP private employment: Consistent with our forecast for the May employment report from the BLS, we expect ADP to report a 205k gain in May private payroll employment (Consensus: 190k).

Q1 GDP, second estimate: The first estimate of Q1 GDP came in at 2.3% q-o-q saar. Incoming data since then suggest the BEA will lower Q2 GDP growth to 2.1% q-o-q saar in its second release (Consensus: 2.3%). Annual revisions to manufacturers’ inventories by the Census Bureau lowered inventory buildup at factories in Q1. In addition, the advance release of the Quarterly Services Survey for Q1 suggests weaker-thanexpected consumer spending on services relative to the BEA’s assumptions, while business investment in intellectual properties may have been greater. Taken together, the net effect was likely negative.

Advance goods trade balance and inventories: The trade deficit narrowed in March as exports rose sharply and outpaced imports. Imports slowed in March, reverting gains in February. We think that a strong increase in goods exports in March likely reverted in April while goods imports rebounded, and we forecast a modest widening in the goods trade deficit to $69.8bn (Consensus: $71.0bn), from $68.3bn. 

Fed Beige Book: The Beige Book prepared for the 12-13 June FOMC meeting is likely to show continued modest to moderate growth across the 12 districts. Incoming data indicate some pickup in consumer confidence during March and April, after disappointing readings in January and February. Moreover, while concerns about US trade policy regarding steel and aluminum tariffs will likely show up again in the June Beige Book, broader concerns about trade tensions with China may have abated somewhat. Tight labor markets and labor shortages likely persisted across most districts with price increases at a “moderate” pace, similar to April. Overall, the data for 2Q have so far been strong and we expect the June Beige Book to reflect that.”

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NZD/USD: is stabilising ahead of key support levels. 
NZD/USD: RBNZ Financial Stability Report and key takeaways:

NZD/USD is currently trading at 0.6894 having made a low of 0.6892 sliding from 0.6941 in yesterday’s trade in Asia. Most of the damage was done in European trade in the that market’s bloodbath on Tuesday as investors wake up to the systemic risks of a European meltdown.

Analysts at ANZ explained that “the Italian concerns roiled markets overnight and sent the kiwi lower after a brief attempt above 0.6950”, adding, “However, the move down has been relatively modest all things considered, with the sharp falls in US yields perhaps cushioning the downside. Recently, the kiwi has struggled to push much below 0.69.”

RBNZ Financial Stability Report

In more recent trade, RBNZ’s Governor Orr has said that the general picture has a very moderate outlook for house prices with the outlook on house price inflation to average between 2%-3% in approaching few years.

As for the RBNZ Financial Stability Report where the financial system’s outlook remains sound, here are the key takeaways:

The financial system remains sound.
There are sufficient capital and liquidity buffers in the banking system.
Household mortgage debt remains at a high level, although financial risks have lessened.
To leave LVR restrictions unchanged.

NZD/USD levels 

Key support is located at 0.6880 while resistance is located at 0.6980. To the upside, 0.6960 and 0.6980 mark key levels of interest, (21-D SMA 0.6948) ahead of 0.7080. However, NZD/USD remains below the 200-month moving average resistance at 0.6980 and weekly technicals remain bearish. RSIs are biased to the downside. Below 0.6850, 0.6780 comes as next downside target meeting the lows of mid-Nov 2017.

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As reported by Reuters, the White House made a statement on Tuesday reminding China that they are still withholding tariffs on a targeted $50 billion of Chinese imports, and if China doesn’t begin to address the US’ accusations of intellectual property theft, they will impose those tariffs.

Washington will also press ahead with restrictions on investment by Chinese companies in the United States as well as export controls for goods exported to China, the statement from the White House said. The announcement on Tuesday restated comments by administration officials that both the tariffs and the restrictions remained in place even after the United States and China sketched out a deal this month to reduce China’s $375 billion trade surplus with America. Even though Washington had not withdrawn the threatened tariffs on imports from China, Beijing reacted harshly to the announcement, saying it was surprised by Tuesday’s statement and would defend its interests.

 – Reuters

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The Reserve Bank of New Zealand’s (RBNZ) Financial Stability Report hit markets early on Wednesday, delivering the central bank’s outlook on the New Zealand economy.

The RBNZ noted that the Kiwi’s financial system remains ‘sound’, and that there is sufficient capital and liquidity buffers within the banking system, but the RBNZ noted that household mortgage debt remains high despite a lessened presence of financial risks. The RBNZ will also be leaving LVR restrictions unchanged, with the RBNZ’s Governor Orr stating that housing price inflation is expected to remain somewhere between 2 and 3%, and a decision on LVRs is unlikely to be seen before the next Financial Stability Report.

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Aussie gives up trying to lift higher, touches back into the 0.7500 level.
Thin readings today on the economic calendar leaves the pair exposed to further downside on market sentiment.

The AUD/USD is trading in the red heading into the overnight session, testing around the 0.7500 handle.

Risk appetite headed south on Tuesday, with equities and energies heading lower, dragging currencies like the commodity-correlated Aussie down as well.

Wednesday brings Australian Building Permits for the month of April at 01:30 GMT, with the headline month-on-month figure expected to contract by -3%, compared to the previous reading of 2.6%.

With risk aversion sweeping back into markets, riskier assets like the Aussie are beginning to give up on their already-sluggish corrections against the Greenback, and even Gold is struggling to gain ground as broader markets recoil from current pricings.

AUD/USD levels to watch

As noted by FXStreet’s Valeria Bednarik, the Aussie’s technical outlook is beginning to gather speed towards the bearish side: “the 4 hours chat shows that the pair broke below all of its moving averages and is now struggling around the key Fibonacci support at 0.7505 that once cleared will likely open doors for a retest of this month low at 0.7411. Technical indicators in the mentioned chart remain within negative levels, with the RSI heading firmly south at 33, supporting the ongoing bearish movement and anticipating additional slides ahead.”

Support levels: 0.7470 0.7435 0.7410

Resistance levels: 0.7540 0.7580 0.7620  

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Analysts at ANZ explained that in its May 2018 Financial Stability Report the RBNZ noted that financial stability risks have not changed materially over the past six months. 

Key Quotes:

“The financial system is sound, but the culture and conduct of banks is in the spotlight – with findings from ongoing investigations to come. Risks related to the housing market have lessened, but house prices and debt remain high.”

“High dairy debt and bank reliance on offshore funding also remain vulnerabilities. Loan-to-value ratio restrictions are unchanged and will only be eased once the RBNZ has sufficient confidence that risks have declined.”

“Given high house prices and household debt, we think the RBNZ should tread carefully in easing restrictions further. Risks are likely to recede only slowly, short of a fundamental change in market conditions.”

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Canada’s Prime Minister, Justin Trudeau, made statements today about the current state of NAFTA renegotiaions, reaffirming his dedication to a fair deal, as well as making a few points about the upcoming G7 meeting which takes place in Canada beginning on June 8th.

PM Trudeau spoke today on NAFTA, stating that continued disruption of current US-Canada trade means more lost US jobs after the US has taken trade with Canada for granted for so long, but that the PM is motivated to accomplish a good trade deal because of all of the uncertainty surrounding the current talks. Trudeau also believes that there is a win-win scenario for NAFTA, and that the US-Canada trade links won’t be changing any time soon. Trudeau also noted that the recent move by the Trump administration on automotive tariffs signals that the US is seeking trade concessions, but despite Canada’s willingness to negotiate Trudeau is unwilling to accept a bad deal.

Touching on the upcoming G7 summit, Trudeau stated that the meeting needs to reassure people about globalization, and that the current challenge for the G7 is to ensure that global growth is being shared fairly, but the Canadian PM also noted that most of the current global political uncertainty is stemming from ‘anxiety’, taking a stab at President Trump’s heavy-handed methods of negotiation and posturing.

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The three main US indices dropped on Tuesday as investors are afraid that the Italian political turmoil crosses the Atlantic and affects the US economy and even the Fed decision on rates.
New elections in Italy are set to take place in late July leading to more uncertainties until a new government is formed. 

The S&P 500 dropped 1.16% to 2,689.86 while the Dow Jones Industrial Average fell 1.58% to 24,361.45. The Nasdaq Composite Index lost 0.5% to 7,396.59.  

The two anti-establishment parties in Italy, the Five Star Movement and the League had chosen eurosceptic Paolo Savona as finance minister. However, Sergio Matarella rejected him and appointed Carlo Cottarelli, a former IMF (International Monetary Fund) official in order to form a temporary government. As a result, the anti-parties abandoned the coalition project and new elections are now expected on July 29. 

Analysts argue that it is unlikely that the Eurozone third-largest economy will leave the Euro currency. However, political uncertainties can slowdown European economic growth. 

“This could be the straw that breaks the camel’s back in the case of prospects for Europe. It will spill over into the US. They won’t buy as many of our imports,” said Chris Rupkey, chief financial economist at MUFG Union Bank.

“When world economic growth has been threatened in the last three years, it was a concern. It hurts confidence on the economic outlook for the US. Given what we know right now, I would not be comfortable rushing out and forecasting a rate hike in September,” added Rupkey. “It’s not a full-blown European sovereign debt crisis yet. For one thing, the Italian 10-year yield is a little over 3%. Back in 2012, it was at 8%. It’s not the same situation yet. I’m sure many American traders wish that Europe, in general, would stop having these mini referendums on whether the euro is going to survive,” Rupkey added. “It’s going to be really dragged out. I don’t think we can trade on this every day. I don’t think 10-year yields in Italy are going to go higher and higher every day, waiting for that vote. The focus is going to shift back pretty quickly to the US, which is employment and wage data on Friday.”

“The chaos in Europe is pushing down US interest rates so money is flowing to the US, fleeing Europe, making people think, that with falling interest rates, coupled with the rising dollar, that the Fed responds by maybe having second thoughts about the trajectory of Fed policy,” said Marc Chandler, head of forex strategy at Brown Brothers Harriman. “It also is a risk to the real economy because Europe’s a big trading partner.”

Dow Jones daily chart


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