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Fed Governor Lael Brainard:

• Economic headwinds are shifting to tailwinds
• There will be "substantial" boost from tax cuts and public spending
• "In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy.
• "Mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations."
• "With greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate."

RBA Governor Philip Lowe said:

• Australian economy expected to be stronger in 2018.
• "Businesses are reporting stronger business conditions than at any time since before the financial crisis."
• Economy is "moving in the right direction and interest rates still quite low, it is likely that the next move in interest rates in Australia will be up, not down."
• But "the board does not see a strong case for a near-term adjustment of monetary policy", thanks to slow progress in unemployment and inflation.

Regarding the steel and aluminum tariffs of the US, Lowe slammed it as "highly regrettable and bad policy".

• "History is very clear here. Protectionism is costly. It's costly to the country that implements the protectionism, and it's costly to everyone else. It's just not the right thing to do."
• "How damaging will this be remains open. If it's just confined to the current higher tariffs on steel and aluminium, then I think it's manageable for the world economy."
• However, "this could turn very badly, though, if it escalates."

RBA is generally expected to keep rates on hold throughout 2018, except that NAB predicts one hike. Slowing growth in Q4 and risk of trade wars would add to the case for RBA to stand pat.

STOCKS

Dow (24884.2, +0.04%) is holding above immediate support near 24500 and while that holds, a rise towards 25500 or higher is possible in the coming sessions. But note that the Dow is reported to be quoting 360 points lower near 24,494 on news of impending resignation of Gary Cohn, National Economic Council Director, from the White House. We would have to see price action near 24500, a break on the downside could negate immediate scope for the upside.

Dax (12113.87, +0.19%) moved up towards 12300 yesterday but came off to close at slightly lower levels. Note immediate resistance at 12300 might hold for a few sessions bringing in another dip towards 11900 or lower. Only on a break above 12300, would we focus on higher levels of 12600.

Nikkei (21377.07%) moved up slightly as the support near 21000 is holding well. Looking at the 3-day candles, there seems to be enough room on the upside towards 22500-22600 levels for the coming sessions. While above 21000, near term looks bullish.

Shanghai (3300.60, +0.33%) has moved up above 3300 breaking the immediate resistance. Now while the upward momentum remains intact, the index could head towards 3350 or higher in the near term.

Nifty (10249.25, -1.06%) and Sensex (33317.20, -1.27%) have broken on the downside negating chances of an immediate bounce back to higher levels. This has been a crucial break of immediate supports and indicates further downside for the medium term. Nifty could head towards 10000 and Sensex may test 32500 in the next few sessions. Near to medium term looks bearish.

COMMODITIES

Brent (65.28) and WTI (62.08) are trading a bit lower than levels seen yesterday. As mentioned yesterday, 66.0-66.50 on Brent and 63.40-63.0 on WTI are important near term resistances and if they hold, the crude prices are likely to fall in the coming sessions towards 64.30 and 61 respectively.

Gold (1.336.80) has moved up a bit and may attempt to re-test higher levels of 1345-1350 in the next 1-2 sessions. Near term looks bullish.

Copper (3.1555) is almost stable. While below 3.18, there is scope of moving to lower support evels near 3.07; else an eventual rise back towards 3.20 is possible.

FOREX

The Dollar Index (89.517), as per expectation, did break the 13 days and 21 days moving average lines on the daily line chart and saw a low near 89.43 yesterday. It is currently trading near 89.5 and the next crucial long term support level is seen on the weekly line charts near 89.0-89.5. However, there is some possibility for support on daily candles near 88 to be tested in the next few sessions if the ECB (meeting on 8th March) doesn’t weaken the Euro. A test of 88 would be extremely bearish for the Dollar since long term support on weekly line chart would have been broken.

Euro (1.2418)- There has been a sharp rise in the Euro as per our expectation yesterday. It will be interesting to see if the Dollar puts up a bit of a fight at current levels or it chooses to allow the Euro more room up to 1.2600-15 before digging in its heels. Importantly, the ECB is due tomorrow and the markets would like to see what Draghi says about the Euro. The charts suggest slightly greater chances (say 55-60%) that the Euro may rise towards 1.26. Draghi will have to be as emphatic as his famous "whatever it takes" statement if he wants to talk the Euro down. In that case the Euro dips back to 1.23 and 1.22. Chances are 40-45%.

Dollar-Yen (105.74) as per expectation tested levels near 106.5 yesterday and is now seeing a dip. It has seen a low of 105.46 today which is very near to the low of 105.55 last seen on 16th Feb. This is the lowest that the Dollar Yen has dipped to in more than a year. A downmove towards 105 could imply medium term bearishness and could lead to a quick test of support close to 104.0-104.5, on daily and 3 day candles.

The Euro-Yen (131.30) as expected, tested resistance near 132 on daily and 3 day candles yesterday and may now dip again towards 129-130 in the coming sessions.

Pound (1.3894) is slowly moving up towards 1.395, which is seen as immediate resistance on daily candles.

Dollar-Rupee (64.96): While the Rupee is currently reacting more to the Dollar weakness in the global currency markets, our hunch is that it will start reacting to Equity weakness also soon. If so, the 64.80-75 region would be a decent Support.

INTEREST RATES

The German 10 Yr – US 10 Yr yield differential (-2.18%) as expected, has bounced from near crucial long term support level of -2.25% via a rise in the German 10 year yield towards 0.675%. We will have to watch out for the ECB meeting on 8th March and 21st March US Fed meeting as they now become extremely vital to the course of yields and forex rates. Any indication of tightening by the ECB might lead to a rise in the German yields and correspondingly the German – US yield spread.

US 10 Year Yield (2.86), US 30 year Yield (3.1275), US 5 year yield (2.63), US 2 year yield (2.237) : US Yields continue their oscillation near respective long term resistances.

The first half of March should see muted movement in US yields – however, some volatility due to the ECB meeting on 8th March is possible. As the 21st March Fed meeting comes closer, there could be a rise in yields in anticipation of a rate hike.

(Long term resistance levels for the 4 yields have been as follows: 2.85-2.90, 3.20, 2.7 and 2.2 respectively – a decisive breach of these levels could happen in March 2nd half.)

So it finally happened. White House economic top economic adviser Gary Cohn resigned. It's reported that the decision was made hours after direct confrontation with Trump regarding the steel and aluminum tariffs. Trump requested Cohn to publicly support the tariff plan. But Cohn, as a free trade advocate, didn't answer. The meeting with industry executives, arranged by Cohn for persuading Trump not to impose the tariffs, was also canceled.

Cohn said in a statement that  "it has been an honor to serve my country and enact pro-growth economic policies to benefit the American people, in particular the passage of historic tax reform."

Trump said regarding Cohn that "Gary has been my chief economic adviser and did a superb job in driving our agenda, helping to deliver historic tax cuts and reforms and unleashing the American economy once again." And,  "he is a rare talent, and I thank him for his dedicated service to the American people."

Stock markets reaction to the news was quiet muted. DOW continued to struggle around 55 H EMA, closed up 0.04% at 24884.12/. Technically, it's also in proximity to 25000 handle, 50% retracement of 25800.35 to 24127.47 at 25008.91. This will a key near term hurdle for DOW to overcome.

S

Key Highlights

• The British Pound started a new upside wave and traded above 1.3800 against the US Dollar.
• There is a crucial bearish trend line forming with resistance at 1.3980 on the 4-hours chart of GBP/USD.
• The US Factory orders declined 1.4% in Jan 2018, more than the forecast of -1.3%.
• The US Trade Balance figure for Jan 2018 will be released today, which is forecasted to register a deficit of $-55.1B.

GBPUSD Technical Analysis

The British Pound found a strong support near 1.3700 against the US Dollar, and recovered. The GBP/USD pair traded higher recently and moved above 1.3800.

The current price action is positive above 1.3800, but the pair is facing a major resistance on the upside near 1.3980.

Looking at the 4-hours chart, there was a support base formed at 1.3711 and the pair moved above the 23.6% Fib retracement level of the last decline from the 1.4072 high to 1.3711 low.

The last few candles are positive, but there is a crucial bearish trend line forming with resistance at 1.3980 on the same chart. Moreover, the 76.4% Fib retracement level of the last decline from the 1.4072 high to 1.3711 low is at 1.3987.

Moreover, the 200 simple moving average (green, 4-hour) is also near 1.3980. Therefore, it won’t be easy for buyers to break the 1.3980 resistance area.

On the downside, supports are seen at 1.3820 and 1.3800. Below 1.3800, the pair may retest the 1.3750 support.

Recently, the US Factory orders report for Jan 2018 was released by the US Census Bureau. The market was looking for a decline of 1.3% in orders compared with the previous month.

The result was disappointing, as there was a decline of 1.4% in orders, which was a lot worse than the last revised reading of +1.8%.

Overall, there was a minor increase in the bearish pressure on the US Dollar, which may continue to help pairs such as EUR/USD and GBP/USD.

Economic Releases to Watch Today

• Euro Zone Gross Domestic Product Q4 2017 (QoQ) – Forecast 0.6%, versus 0.6% previous.
• BoC Interest Rate Decision – Forecast 1.25%, versus 1.25% previous.
• US ADP Employment Change Feb 2018 – Forecast 195K, versus 234K previous.
• US Trade Balance Jan 2018 – Forecast $-55.1B, versus $-53.1B previous

Australia GDP Q4: 0.4% qoq vs exp 0.5% qoq vs prior 0.7% qoq

Australia GDP Q4: 2.4% yoy vs exp 2.5% vs prior 2.9% yoy

From the release: Chief Economist for the ABS, Bruce Hockman, said: "Growth this quarter was driven by the household sector, with continued strength in household income matched by growth in household consumption."

Full release here

AUD/USD struggling to break 55 day EMA and topped at 0.7814. Rebound from 0.7712 is corrective looking. Focus back on whether 55 H EMA could hold.

Cohn Shocker

The morning Whitehouse shocker is that Gary Cohn is resigning as head of the White House’s National Economic Council. His resignation increased the risk tenfold that President Trump will follow through with far-reaching trade tariffs given that Cohn was said to be remaining in his role to convince Trump to reverse his trade policy views, or at least temper them.

Predictably USDJPY is wearing the initial brunt of the move, and in general, the Cohn announcement is reversing the positive risk sentiment from the unexpected news from North Korea after reports that North Korea is open to denuclearisation if the safety of its regime is guaranteed.

While the world appears to be in a safer place this morning due to the denuclearisation olive branch offered by North Korea, the market is no less safe from the wrath of Trump’s trade policies.

Gold Prices

Gold was trading positively overnight on the back of the softer USD trend BS continues to perform exceptionally well on that narrative. But prices will remain firmly supported on the tariff tail risks from Cohn departure as the tariff gambit hits the market again with blunt force.

Oil Prices

What goes up must come down or the opposite in the case of US oil inventories data. The American Petroleum Institute (API) reported a considerable build of 5.661 million barrels for the week ending March 2, e doubling up analysts expectations. Early trade WTI prices remain tentatively supported by the weaker dollar. But with the overhang from the Cohn resignation yet to filter through market’s, risk aversion could see OIl prices move lower during today session.

Overnight long USD hedges were unwound as on the news from South Korea that North Korea was willing to hold talks with the United States on denuclearisation

Currency Markets

Japanese Yen

A bit of a topsy-turvy 24 hours for USDJPY spiked on the Korea headlines from 105.90 towards 106.40, which was pips shy of the significant 106.50 support. But is back plumbing the depths this morning as Tariffs are back in play on the back of Cohn’s resignation.

US politics is an absolute mess inspiring little confidence in the President, and this real-life political melodrama unfolds it hard to avoid parallels with Tumps for TV show The Apprentice.

The Malaysian Ringgit

Decision day for the BNM but the market is expecting few if any fireworks. Regional currency sentiment received a boost after surprising news that North Korea is open to denuclearisation if the safety of its regime is guaranteed.

The prospect of trade tariffs is raising their ugly head again, but when all is said and done, these tit-for-tat tariffs are not significant enough factor to weigh on MYR sentiment let alone derail the buoyant global growth narrative.

The USD was lower against most major pairs as trade fears receded and sparked a sell off of the American currency. The ADP will mark the first release of February employment data in the US at 8:15 am EST on Wednesday, March 7. Strong gains are expected from private payrolls with the market looking ahead to the U.S. non farm payrolls (NFP) on Friday with a special attention paid to the wages component seeking signs of higher inflation. The Bank of Canada (BoC) will release its rate statement at 10:00 am EST with no press conference to follow the release of the statement. Weekly crude inventories will be published at 10:30 am EST with the results guiding prices that are caught in a tight trading range.

• BOC expected to keep rates unchanged at 1.25%
• ADP payrolls report forecasted to show gain of 194,000 US jobs
• Weekly US crude inventories expected to increase buildup putting downward pressure on prices

Canadian dollar rebounds despite US tough trade talk

The USD/CAD lost 0.52 percent in the last 24 hours. The currency pair is trading at 1.2898 ahead of the Bank of Canada (BoC) rate statement. The BoC will publish its statement on Wednesday, March 7 at 10:00 am. The central bank is not expected to make changes to the benchmark interest rate, keeping it unchanged at 1.25 percent. Canadian fundamentals have slowed down since the BoC hiked rates two times in 2017. The uncertain fate of NAFTA has also keep the loonie under pressure as Donald Trump’s words on trade are not reassuring investors the trade deal can be renegotiated.

The BoC is still expected to raise rates three more times in 2018 to keep up with the U.S. Federal Reserve. The US central bank is anticipated to hike three or four times this year as the economy keeps growing at steady pace, with the biggest question mark being the slow path of inflation. The fourth quarter of 2017 marked a slowdown of Canadian indicators after a strong Q3, but the close relationship it has with the US and the White House’s tough talk on trade are keeping the USD/CAD near 1.30 despite the market selling off the USD to seek higher returns. The lonnie recovered ahead of the BoC but all eyes will be on the U.S. jobs data this week looking for signs of US inflation and validating four rate hikes from the Fed this year.

The CAD and the MXN recovered from earlier setback as the anti-trade rhetoric from Washington has moved to the background, but with the NAFTA renegotiations talks leaving very little to show for seven rounds it would apear it could be a short lived respite. Mid term elections in the US and presidential elections in Mexico will make the team of negotiators harder as the trade agreement will become a political target.

The price of energy is close to its opening price on Tuesday. West Texas Intermediate is trading at $62.60 after opening in Asia at 62.73. Crude is trading in a tight range oil ahead of the weekly US crude inventories release on Wednesday, March 7 at 10:30 am EST. The Organization of the Petroleum Exporting Countries (OPEC) partnered with other major producers to limit oil production but the stage is set for the US and other nations who did not join the agreement to start ramping up supply. The International Energy Agency released today a report forecasting that 80 percent of global demand will be met by non-OPEC producers.

The softness of the USD after trade talks and North Korea closer to a historic summit with North Korea have kept the price of energy from falling ahead of the release of crude stocks in the US. The market is forecasting a rise of 2.5 million barrels in crude inventories.

The EUR/USD gained 0.57 percent on Tuesday. The single currency is trading at 1.2406 after the EUR has recovered from the political anxiety going into the previous weekend. Italian election results came in as predicted with a hung parliament as the most likely outcome but noting a rise of anti Europe representation. The German coalition formed a new government with the SDP once again teaming up with Merkel’s CDU/CSU to form a grand coalition despite their initial reluctance. In Germany like in Italy nationalist parties are on the rise making it harder for pro European parties to stay in power without coalition partners. The political hurdles behind the euro rose against the US dollar and is looking ahead at the European Central Bank (ECB) monetary policy meeting on Thursday.

The ECB is not expected to announce any major changes but could continue playing its neutral card as economic indicators have not been impressive of late, added to that is the rise of anti-trade rhetoric in the US but the central bank could still remove key language in its statement clearing the way for an end of quantitive easing in Europe. The rhetoric form the ECB will be measured to avoid sounding too hawkish, while at the same time avoiding a rise in the currency. The ECB is due to release its economic forecasts, but economists do not expect major deviations from previous targets.

Market events to watch this week:

Wednesday, March 7
8:15am USD ADP Non-Farm Employment Change
8:30am CAD Trade Balance
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
10:30am USD Crude Oil Inventories
7:30pm AUD Trade Balance
Thursday, March 8
7:45am EUR Minimum Bid Rate
8:30am EUR ECB Press Conference
Midnight JPY BOJ Policy Rate
Midnight JPY Monetary Policy Statement
Friday, March 9
JPY BOJ Press Conference
4:30am GBP
Manufacturing Production m/m
8:30am CAD Employment Change
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change

Gold has posted sharp gains in the Tuesday session. In North American trade, the spot price for an ounce of gold is $1336.39 up 1.19% on the day. In economic news, there are no major US events. Factory Orders were unexpectedly soft, with a decline of 1.4%. This was well short of the estimate of -0.4%. On Wednesday, the US releases ADP Nonfarm Employment Change.

In the US, tensions over proposed tariffs on steel imports continue to hurt the US dollar, which has been a boon for gold prices on Tuesday. President Trump appears set on applying stiff tariffs of 25% on steel, much to the consternation of the European Union and other US trading partners. However, there is plenty of domestic opposition to Trump's plan, as Republican lawmakers, including House Speaker Paul Ryan, have come out strongly against the move. If Trump doesn't back down, the Republicans could even resort to legislation to limit Trump's authority on tariffs. The announcement of the tariffs last week sent the dollar broadly lower, and if the tariffs are introduced, negative investor sentiment could keep the gold rally going. Until this dispute is resolved, traders should be prepared for continuing volatility in gold prices.

Gold prices often climb in response to geopolitical tensions, and Britain's exit out of the European Union seems to be getting bumpier each day. Tensions are growing between London and Brussels as the Brexit deadline of March 2019 looms ever closer. Last week, there were sharp exchanges between the two sides after the EU releases a draft of the legal framework of the Brexit agreement. On Friday, Prime Minister May outlined her vision of relations between the EU and Britain after Brexit. May sought to lower the recent sharp rhetoric surrounding Brexit, saying that both sides needed to show flexibility in order to reach an agreement. May said that she was seeking a free trade agreement with the EU that included financial services. The response from Brussels has been lukewarm, with some policymakers saying that Britain continues to operate under the illusion that it can leave the club but still enjoy the benefits.

Equity index futures are down sharply (S&P minis -33 pts or -1.2%) after the announced resignation of White House top economic advisor Gary Cohn, long regarded as the remaining "adult in the room" when it came to economic/fiscal policy was instrumental in shaping up Trump's tax reform. Cohn's sharp disagreement with Trump's trade war approach is widely attributed to his departure. A new Premium trade has been issued earlier today. There are 10 Premium trades in progress; 8 in the green, 1 flat and 1 at a loss.

The twists and turns of tariff talk gave the loonie some relief on Tuesday. Trump tied them to a new NAFTA deal and, at the same time, Congress and business lobbies have rallied to head off a trade war. USD/CAD touched just above 1.3000 before sinking down to 1.2875.

The drop erases Monday's gain and leave some uncertainty about a break above the late-2017 highs. That's likely to be resolved with the Bank of Canada rate decision on Wednesday. The OIS market is pricing in a 13% chance of a hike but even that number is too high with virtually no economist is predicting a move.

The latest round of economic data in Canada sharply deteriorated and that's compounded by the trade talk. The previous BOC statement included the line "recent data have been strong" and that's almost certain to be downgraded.

Guidance, however, is likely to remain largely intact so the risks to the loonie are probably modest. That said, the BOC certainly has a flair for the dramatic and officials will tread cautiously on trade.

The bigger current question for the loonie is about the uncertainty between any implementation of tariffs and a NAFTA agreement. It's unclear if the White House will give Mexico and Canada a waiver while NAFTA negotiations continue. If not, that would provoke a kneejerk lower in CAD and MXN.

One indicator that can't be overlooked on Wednesday is trade data from the US and Canada. We've written recently about the rising US trade deficit and corresponding risks of clumsy policies to counteract it. The US trade deficit is expected at $55 billion per month in January.