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Risk Appetite Returns as EU’s Retaliatory Tariff Proposal Would Force Trump to Fold His Cards

Kiwi and Aussie are leading the way higher in the currency markets as risk appetite returns. On the other hand, Yen and Dollar are trading as the weakest ones today. Markets are increasing getting convinced that US President Donald Trump will back off from his steel and aluminum tariffs. He’s facing strong opposition from his own party and closest aides, as well as from global leaders. In partcular EU’s counter-threat of retaliatory tariff would add pressure to Trump to fold his cards. At the time of writing FTSE is up 0.79%, DAX up 1.08%, CAC up 0.77%. Earlier, Nikkei closed up 1.79%. US futures point to another day of rebound.

EU proposes 25% retaliatory tariff to US

It’s reported that EU is preparing retaliatory tariff to the US, should Trump impose the 25% tariff on steel and 10% on aluminum imports. Bloomberg reported that EU targets to apply 25% tariff on a range of US goods that costs as much as EUR 2.8b. And the list obtained include motorcycles, jeans and bourbon whiskey. Around EUR 1b will be on consumer goods, motorbikes and pleasure boat. EUR 0.95b will be on whiskeys and agricultural products. Meanwhile, EUR 8.5b will be on steel and other industrial products. The list was discussed by the European Commission on Monday evening.

European Commission’s chief spokesman Margaritis Schinas said regarding March 7 EC meeting. He noted that “the Commissioners will discuss our reaction. It will be swift, firm, and proportionate – based on three main criteria compatible with WTO rules.” Also, EU “cannot be expected to bury our heads in the sand when someone takes unilateral and unfair actions against us that put thousands of European jobs at risk”. But he also emphasized that “trade policy is not a zero-sum game” and it “can and should be win-win.”

EU Verhofstadt urged May to move beyond aspirations

European Parliament’s Brexit representative Guy Verhofstadt is meeting UK Brexit Secretary David Davids in 9 Downing Street today. Verhofstadt will also meet Cabinet Office minister David Lidington and Home Secretary Amber Rudd at 10 Downing Street where Prime Minister Theresa May would stop by. Verhofstadt urged May to move beyond “vague aspirations” and give “credible proposals” after her Mansion House speech last Friday

May called for a system of “mutual recognition ” on the trade deal with EU after Brexit. That is, the two trading partners should recognize each other rule, yet they’re free to adopt their own ways. The system is to be overseen by a joint UK-EU court. EU negotiator Michel Barnier’s chief adviser Stefaan de Rynck blasted it as a “failed” system. He said “there was a time we thought it would lead to market efficiency, but with the financial crisis we have gone for an approach of more harmonization and centralization and more EU bodies overseeing that and stronger powers for those bodies.”  And, “if you are in a very integrated market with a third country but you don’t have the joint enforcement structures, then you can see the potential for all kinds of difficult situations.

Eurozone retail PMI improved to 52.3

Eurozone retail PMI rose to 52.3 in Feb, up from Jan’s 50.8. Markit noted in the statement that “the latest data highlight another positive month for the eurozone retail sector, with sales up at a quicker pace on a monthly basis. In turn, this contributed to a renewed bout of optimism, with the survey’s measure of business confidence among the highest over the last year. Further expansions in purchasing activity and employment underscore retailers’ positive outlook. Nevertheless, gross margins continued to be squeezed, suggesting business conditions remain challenging.”

Swiss CPI closed to 0.6% yoy

Swiss CPI rose 0.4% mom, 0.6% yoy in February, versus expectation of 0.3% mom, 0.6% yoy. Swiss Federal Statistical Office FSO said in the released that “the 0.4% increase compared with the previous month can be explained by several factors including rising prices for air transport. Foreign package holidays also recorded an increase, as did clothing and footwear due to the end of the seasonal sales. In contrast, prices for heating oil, coffee and overnight stays in hotels decreased.”

BoJ Kuroda: May think about stimulus exit 2019, but not necessarily doing

BoJ Governor Haruhiko Kuroda appeared in his confirmation hearing in the upper house today. Kuroda said that there is not plan to raise short-term rates or abandon negative rates right now. The central bank start thinking about stimulus exit in fiscal 2019, when inflation is forecast to meet the 2% target. But Kuroda added that “right now it’s too early to debate what tools we should use, and what kind of pace we should take.”  He also emphasized that BoJ might not exit stimulus even then.

RBA: Rate of wage growth troughed

Aussie trades mildly higher after RBA kept the cash rate unchanged at 1.50% as widely expected. The statement is almost likely a carbon copy of the prior one. Nonetheless, RBA sounded more optimistic on wage growth as it said that “the rate of wage growth appears to have troughed”. Regarding the economy, Australian economy is expected to grow fast in 2018 than in 2018. Regarding inflation RBA maintained that “the central forecast is for CPI inflation to be a bit above 2 per cent in 2018.” The statement concluded by maintaining “holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”

More on RBA: RBA Left Cash Rate Unchanged At 1.5% As Property Markets Cooled

Released earlier in Australia retail sales rose 0.1% mom in January, below expectation of 0.4% mom. Current account deficit widened to AUD -14.0b in Q4.

AUD/USD Mid-Day Outlook

Daily Pivots: (S1) 0.7737; (P) 0.7754; (R1) 0.7782; More…

AUD/USD’s rebound from 0.7712 extends to as high as 0.7834 so far today. But still it’s limited below 0.7892 resistance. Such rebound could still be a corrective move only. Intraday bias stays neutral first. On the downside, break of 0.7712 will extend the fall from 0.8135 towards 0.7500 key support level. However, break of 0.7892 will suggest that the pull back from 0.8135 is already completed. In such case, intraday bias will be turned back to the upside for 0.7988 and then 0.8135 again.

In the bigger picture, medium term rebound from 0.6826 is seen as a corrective move. It might still extend higher but we’d expect strong resistance from 38.2% retracement of 1.1079 to 0.6826 at 0.8451 to limit upside to bring long term down trend resumption. On the downside, break of 0.7500 support will now be an important signal that such corrective rebound is completed.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
0:01 GBP BRC Retail Sales Monitor Y/Y Feb 0.60% 0.50% 0.60%
0:30 AUD Current Account Balance (AUD) Q4 -14.0B -12.3B -9.1B -11.0B
0:30 AUD Retail Sales M/M Jan 0.10% 0.40% -0.50%
3:30 AUD RBA Rate Decision 1.50% 1.50% 1.50%
8:15 CHF CPI M/M Feb 0.40% 0.30% -0.10%
8:15 CHF CPI Y/Y Feb 0.60% 0.60% 0.70%
9:10 EUR Eurozone Retail PMI Feb 52.3 50.8
15:00 USD Factory Orders Jan -1.30% 1.70%
15:00 CAD Ivey PMI Feb 56.3 55.2

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