The prospects of a trade war have increased due to the US tariffs on steel and aluminum. However, at the last minute, President Trump shifted and opened the door to exemptions, including for Canada and Mexico. Australia experiences a bilateral trade deficit with the US and cooperates in military matters, and may also be in line to be granted dispensation.
The fear of a trade war seems to be much greater than when Obama put tariffs on tires, and Bush slapped a 30% tariff on steel (with many exemptions). However, outside of some symbolic moves, the most likely course of action based on precedent and game theory would suggest avoiding a tit-for-tat trade war, which would do more to weaken the multilateral trade order than the US tariffs. Instead, challenging the US action at the WTO strengthens the rule of law and is strategically and tactically the most likely course.
The prospect of a summit between North Korea and the United States saw Japanese and Korean stocks rally at the end of the week. On the one hand, the prospects of talks may be a sign of a de-escalation of tensions, which understandably supports risk-on strategies. On the other hand, while the talks are a positive step, this likely simply marks a new phase.
North Korea has a chit, its intercontinental ballistic missile capability that draws the US’ attention. The development of this power was done purposefully and not simply to denuclearise the peninsula. After all, the US nuclear capability is so much larger than what is in South Korea. The bottom line if there is a peace dividend to be found in Korea, there is much work to be done before it can be collected.
Markets will pivot around two key considerations – will any prospective tariffs include exemptions and who will replace Cohn as Trump’s chief advisor. Tariff exemptions and a mainstream pro-business adviser should trigger a relief rally, and vice versa.
Beyond that, longer term reservations about the USD persist: three Fed hikes are now discounted into year’s end. Any further Fed-driven USD upside is thus contained to just one more hike in 2018 – the bar for five hikes is impossibly high. Protectionist rhetoric is unlikely to ease anytime soon either and may if anything may escalate into US midterms.
On another note, Gold continued losing ground at the start of a new trading week and tumbled to fresh session lows, around $1315 yesterday.
Following an early yesterday European session breakdown below the post-NFP consolidation phase, a modest US Dollar rebound aggravated the selling pressure around dollar-denominated commodities – like gold. This coupled with strong gains across European equity markets was further seen denting the precious metal’s safe-haven appeal and contributed to the sharp retracement slide over the past couple of hours. Moreover, possibilities of some short-term trading stops being triggered, on a decisive break below $1320 level, could also be one of the factors behind the commodity’s downfall through the mid-European session.
Meanwhile, a slowdown in the US wages growth now seems to have eased concerns of rising inflationary pressure and dampened the commodity’s demand as a hedge against inflation. Even fading expectations over more aggressive Fed rate hikes in 2018 also did little to lend any support and stall the non-yielding yellow metal’s downfall on Monday.
The highlights on Wednesday are the US MBA mortgage market applications with the average 30-year mortgage rate topping 4.65% — the highest level in over 4-years — refis may continue to ebb. US PPI is forecast sinking 0.1% in February with core seen rising 0.2%. US Retail sales are seen returning a healthy 0.5% or 0.6% ex-auto after sluggishness around the turn of the year, while US January business inventories are expected to rise 0.6% from 0.5%.
From the EU zone we have the dovish leaning triumvirate – Draghi, Constancio and Praet who are scheduled to speak on Wednesday and will have further opportunity to play down the importance of the change in guidance that took out the option to lift monthly purchase levels, while keeping the possibility of a program extension in place. The tweak in the statement merely had a signaling character and confirmed that the central bank is inching toward an exit from net asset purchases at a snail’s pace. The data calendar focuses mainly on final February inflation numbers, which are unlikely to bring major surprises. We will looking at German HICP also at 1.2% y/y, and the French at 1.3% y/y. –FXStreet
EUR/USD
From a technical point of view, the risk is skewed toward the downside in the short term, given that in the 4 hours chart, the pair settled below all of its moving averages, with the 20 SMA accelerating south, and now nearing the 38.2% retracement of the last two week’s rally, around 1.3240, where the pair set its daily high and reinforcing the level as resistance. Technical indicators in the mentioned chart have bounced from their daily lows, but remain within bearish territory, and particularly the RSI has turned flat around 47, indicating limited buying interest for the common currency. –FXStreet
GBP/USD
The GBP/USD is surprisingly resilient this week, climbing on thin volumes for Monday and hanging onto gains heading through Tuesday’s early trading session, and the pair is trying to hold territory above 1.3900. Technically, the pair presents a modest bullish stance according to the 4 hours chart, as the pair settled above its 20 SMA and 200 EMA, both anyway flat and within a limited range, a sign of absent directional strength, while technical indicators have entered bullish territory, now decelerating but still heading north. –FXStreet
USD/JPY
The Japanese Yen picked up a bid in early Asia, tracking the somber mood in the US and Asian equities. Consequently, the USD/JPY dipped to 106.25 earlier today. However, the decline below the key descending trend line (drawn from the Jan. 8 high and the Feb. 2 high) support was short-lived. Now trading near its daily low, the pair is biased lower according to technical readings in the 4 hours chart, mostly due to its failure to settle above the 107.00 level. In the mentioned chart, the pair is now battling below a horizontal 100 SMA, and far below the 200 SMA, while technical indicators head south within positive territory and nearing their mid-lines. –FXStreet
Gold
Gold managed to recover from earlier losses and climbed back above $1320. Near the end of the session it was hovering near $1322, around the same level it closed last week. –FXStreet
KEY ECONOMIC CALENDAR EVENTS FOR March 13th
AUD RBA Assist. Gov. Spenser speaks
AUD RBA Assist. Gov. Bullock speaks
AUD NAB Business Confidence
EUR ECOFIN Meetings
GBP Annual Budget Release
USD CPI (m/m)
USD Core CPI (m/m)
CAD BOC Gov. Poloz speaks
NZD Current Account
