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The US Dollar was edging lower along the 100-hour SMA on Tuesday. The Yen, however, managed to strengthen 45 pips during the Asian session, as risk-averse traders responded negatively to the resignation of Trump's economic advisor Gary Cohn that have heightened concerns over a trade war.

The pair has since remained stable, lingering slightly above the 2017 low of 105.35. If looking at today's session, some downside potential is still apparent for the pair. Even if the aforementioned low is breached, the Greenback should be stopped by a downward-sloping trend-line near 105.10.

In terms of resistance, a possible near-term target is the 200-hour SMA, the weekly PP and the upper boundary of a three-month channel circa 106.25.

The yellow metal took advantage of the weaker US Dollar on Tuesday, thus managing to surge by 1.44% and reaching the 1,340.00 mark late in the evening. The pair breached the prevailing four-week channel down along the way, at the same time providing the second upper confirmation of a more junior pattern.

Technical indicators are in favour of a fall in this session that should be targeted towards the combined support of the 200-, 55– and 100-hour SMAs near 1,325.00. The general direction, however, should be tended north this week, seemingly along the lines of the aforementioned junior channel, in order to test the most senior pattern circa 1,355.00.

Meanwhile, gains should be capped near the weekly R1 at 1,350.00 today.

Trade war weighs on markets

Global equities remain under pressure on Wednesday despite positive developments in the Korean peninsula, which suggests that market participants are more focus on the formalisation of Trump new trade tariffs. The Nikkei ended the session down 0.77%, Hong Kong Hang Seng was off 1.03%, while Singapore's STI fell 2.03%.

South Korea and North Korea are planning a meeting at the end of April. The news came on the back of the announcement that Kim Jong Un, the North Korean leader, was willing to give up on its nuclear programme, should the safety of the regime will be guarantee. Maybe the inconsistency and unpredictability of Kim Jong Un is keeping investors on their toes.

In the US, the resignation of Gary Cohn as director of National Economic Council suggests that Trump is actually moving forward with its trade war. Therefore, the market remains broadly in risk-off mode as the Japanese yen and the Swiss franc extended gains against the greenback. The former was up 0.50%, while the latter rose 0.35%. For now, it is hard to know where to stand, as there is a lot of moving pieces on the political side. On the other side of the Atlantic, the single currency kept grinding higher against the US dollar, with the most traded currency pair hitting 1.2434 during the European morning. We remain positive on the currency pair with the 1.2550 as next target.

Canada to maintain monetary policy intact

In the context of growing tensions with its first commercial partner, fighting on the front of NAFTA's new terms and conditions and recently adding up tariffs on aluminum (10%) and steel (25%), Bank of Canada Governor Stephen Poloz faces the unique choice of maintaining monetary policy unchanged during tomorrow's monetary policy meeting in Wellington, Ottawa. Currently given at 1.25%, BoC's lending rate benchmark is not expected to rise until the second half of 2018 (last hike in January 16th, 2018).

Though market volatility remained lively in previous days, Canadian S&P/TSX index remained stable, valued at 15'545 (+1.05% since Monday, March 2nd 2018), supported by major sectors and particularly Health Care, Materials, Energy and Financials while the only laggard remained Industrials, strongly impacted by Bombardier (-4.80%) and Canada National Railway (-1.83%) underperformance. Materials stocks outperform broader market due to weaker USD (Gold and Silver rise) backed by decreasing fears of trade wars. On currency side however, we see further weakness emanating from CAD against major currencies. USD/CAD, EUR/CAD and GBP/CAD trade at 1.2929 (+5.41%), 1.6063 (+4.67%) and 1.7962 (+2.65%) since February 1st, 2018.

The pair accelerated lower on Wednesday after resignation of Trump’s advisor Cohn, pressured dollar and sparked fresh risk aversion, increasing demand for safe-haven yen.

Fresh weakness was signaled by recovery stall at 106.44 Fibo 23.6% barrier on Tuesday and daily trading shaped in long-legged Doji, with subsequent fall, completing reversal.

Near-term focus turns lower after limited correction, eyeing low at 105.24 (02 Mar) and psychological 105 support, with break lower to spark stronger bearish acceleration.

Negative stance is reinforced by firm bearish setup of daily studies, favoring continuation of larger downtrend on break below 105.24 / 00 pivots.

Near-term action is pressured by thick hourly cloud (105.85/106.08) which guards strong barrier and upper pivot at 106.44 (Fibo 23.6% of 110.28/105.24 fall, reinforced by descending 10SMA).

Only firm break above 106.44 would sideline downside risk and signal further recovery.

Res: 105.85, 106.18, 106.44, 106.96
Sup: 105.45, 105.24, 105.00, 104.64

Currency pair EUR/USD

The EUR/USD bullish momentum continued yesterday with a bullish breakout above resistance (dotted orange). A break below the support trend line (blue) could see price retest the left shoulder (purple lines) which could create a potential inverted head and shoulders pattern.

The EUR/USD is probably in a wave 5 (blue) of wave 1 (purple). A break above the 78.6% Fib target could price extend the wave 5 to higher Fib levels whereas a bearish break could see price retest wave 2.

Currency pair GBP/USD

The GBP/USD bullish bounce seems to be showing strong momentum, which makes a wave 1 (green) more likely at the moment. A bullish break above resistance (red) could confirm wave 5 (brown).

The GBP/USD has either completed a 5th wave (grey) and will correct lower when it breaks support or it could break for one more higher high. A break below the 100% Fib of wave 2 vs 1 invalidates the wave 2.

Currency pair USD/JPY

The USD/JPY did not manage to break above the resistance trend line (red) and therefore could still be in a wave 5 (blue).

A bearish reversal took place at the resistance trend line and price seems to be building one more wave 5.

The USD/JPY dropped heavily to its session lows after Trump cancelled Thursday's Tariff meeting. Now we can see that the price is exactly at the POC zone and it is either "make it or break it".The price might spike from 105.75-60 zone to the upside. In that case targets are 105.94 and 106.25. Only above 106.25 targets are 106.44 and 106.72. H1 momentum or 4h close above 106.75 aims for 107.05.A drop below 105.45 should target 105.04. If we see a daily close below 105.00 then 104.38 is next target.

W H3 - Weekly Camarilla Pivot (Weekly Interim Resistance)

W H4 - Weekly Camarilla Pivot (Strong Weekly Resistance)

M H4 - Monthly Camarilla Pivot (Very Strong Monthly Resistance)

M L3 – Monthly Camarilla Pivot (Monthly Support)

M L4 – Monthly H4 Camarilla (Monthly Strong Daily Support)

POC - Point Of Confluence (The zone where we expect price to react aka entry zone)

Cable holds in red in early European trading on Wednesday, accelerating lower after upside attempts were rejected under Tuesday's new recovery high and capped by 20SMA (1.3911).

Fresh risk aversion on Trump advisor Cohn's resignation dragged sterling lower after for straight bullish days.

Near-term action is holding between 20SMA (0.3911) and rising 55SMA (1.3813), with fresh direction signal to be generated on break of either side.

Sideways-moving 20SMA which repeatedly capped recovery marks pivotal resistance, while ascending 55SMA underpinned bullish acceleration in past two days and marks lower trigger.

Lift above 20SMA is needed to open way for final push towards next key barriers at 1.3932 (Fibo 61.8% of 1.4070/1.3711) and 1.3960 (daily cloud top), break of which would generate stronger bullish signal.

Conversely, loss of 55SMA would signal an end of corrective phase from 1.3711 and shift near-term bias lower.

Mixed setup of daily MA's and firmly negative momentum studies provide no clear direction signals, which could be provided on break through initial pivots.

Res: 1.3911, 1.3932, 1.3960, 1.3996
Sup: 1.3845, 1.3813, 1.3766, 1.3740

• In this piece, we try to dive into US trade policy from different angles, what it means for the economy and what to expect from here.
• We do not expect the recent developments to evolve into a full-blown trade war but measures to be taken in fairly narrow areas (small part of global trade). Hence, we expect the impact on US growth and inflation to be fairly limited.
• There is a risk that we are too optimistic and that there will be a bigger trade war, which would be negative for the global economy and global risk sentiment and would lift inflation by more than we expect.
• Trump's formal decision is likely to be postponed until next week but the White House is signalling he is not backing down. Gary Cohns's resignation supports this view. Trading partners unlikely to retaliate until formal decision has been made. Next step for Trump is likely measures targeted at China.
• In our risk scenario, we expect a weaker USD due to slower US growth and US isolation to dominate traditional USD support from lower global risk sentiment.

Trump shifting focus to trade

US President Donald Trump's announcement that he intends to put a 25% tariff on steel and 10% on aluminium has increased the fears of a global trade war although this was widely expected. Trump has tweeted intensively on trade recently, saying 'trade wars are good and easy to win' and that the US has a large trade deficit 'because of our very stupid trade deals and policies' and threatened the EU that he would impose tariffs on cars from Europe (see tweet).

After Trump's success in passing the tax reform and budget deal (and the Republicans' inability to reform health care), we are not surprised Trump is moving his attention to trade policy, as 'America First' and protection of the US were key pledges during his election campaign. This is also in line with what Commerce Secretary William Ross hinted at in the autumn when he said that the administration would shift focus to trade policy after the tax reform. The promotion of Peter Navarro to assistant to the president for trade policy is another sign that focus has shifted to trade.

So far the tariffs are mainly symbolic, as imports of steel and aluminium only account for 2% of total imports of goods in the US and it remains our base case that this is not going to evolve into a full-blown global trade war, as it would hurt everyone economically. The impact on US growth and inflation should be limited also if trading partners are countering US tariffs. While protectionism is bad for global risk sentiment (lower yields and equities), we think the market impact will be limited in our base case. We still think it is likely that Trump will go further, targeting China explicitly, as the US's largest trade deficit is with China (see chart to the right) but these measures are likely to be small in the bigger picture as well.

Republicans are pushing back on protectionism

Especially within the Republican Party, the establishment is pushing back on the protectionist agenda; most notably House Speaker Paul Ryan. Trump's economic advisor Gary Cohn was also against protectionist measures, which he considered business-unfriendly, but he resigned yesterday. Many Republican politicians think Trump should target China and not US allies, see Financial Times and the discussions mean the formal decision has been postponed until next week, see NYTimes. The White House is signalling that Trump is not backing down.

Trump can implement the tariffs on steel and aluminium without Congressional support through Section 232 of the 1962 Trade Act based on 'national security' concerns. The US Congress may try to prevent this by passing a bill, but Trump can just veto the bill unless it is passed by a two-thirds supermajority in both the House of Representatives and the Senate, which might prove difficult.

It is important to note that Trump's tariffs are going to be fundamentally different from the ones George W. Bush implemented in 2002. George W. Bush used a clausal (Section 201 of the Trade Act of 1974) stating that the President can impose tariffs on imported goods if they are threatening domestic industries. Trading partners filled a WTO complaint and won the case but it is unclear what the WTO will do now Trump may use the 'national security' exemption. The fear is this this opens up a Pandora's Box, as other countries could easily use the same reason for protectionist measures, which might result in 'the Wild West' in the global trade area.

Another concern is that Trump may choose to withdraw the US from the WTO. He mentioned this during the election campaign when he called the WTO 'a disaster', see Financial Times. Trump's administration could also just decide to ignore WTO rulings, something which has been put on the table before, see Reuters. It is interesting that the Trump administration continues to block appointment of new WTO judges to the Appellate Body ('supreme court of world trade'), which has slowed down handling of trade disputes, see Reuters.

Trump thinks trade is a zero sum game

Trump thinks trade is a zero sum game and this is a view that Trump has repeated since the 80s (see e.g. interview with Oprah Winfrey from 1988 here (YouTube)). If the US is running a trade deficit with country A, A is winning and the US is losing. This is also why Trump is lashing out at countries like China, Mexico and Germany, who have a large trade surplus with the US (see chart on front page). We consider trade a positive sum game from a macroeconomic perspective but acknowledge that there might be winners and losers from a microeconomic perspective. In US media there are stories about manufacturers praising Trump, as they think NAFTA and China are to blame for the decline in manufacturing employment, see e.g. CNN Money. Total manufacturing employment has declined from around 18m 20 years ago to 12m now, not least in the 'Rust Belt' with states like Ohio, Pennsylvania and Michigan, all three important swing states that Trump won. In reality, there are likely other forces at play (e.g. automatisation), as manufacturing output has risen 150% since 1980 despite manufacturing employment having fallen 34% during the same period.

Trump's pledges to protect US companies ('America First') and implement protectionist measures help to explain his victory and with a low approval rating it makes sense for Trump to try win back popularity by acting on it before the US midterm election in November (the Republican leaders disagree with this strategy).

Our base case is that Trump will stick to symbolic measures, as it would satisfy his voter base without starting an actual trade war. If we are right, this would not slow GDP growth or lift US inflation significantly. For example, 900kg of steel is used per vehicle on average, according to the World Steel Association, which cost approximately 588 dollars to buy. Assuming the tariffs increase the steel price by 25% (unlikely as car producers are likely to buy domestic-produced steel instead), the price would be 735 dollars instead, an increase of around 147 dollars. The average selling price of a new vehicle was 34,450 dollars in 2016, so steel input only accounts for 1.7% of the total selling price. The price of an average car including 25% higher steel costs would be 34,596 dollars, an increase of 0.4%. As a new vehicle only accounts for 3.8% of total CPI, it would lift CPI inflation by only 0.02 percentage point. Of course there are other items being hit as well (the price increases will likely come with a lag, as prices only change infrequently) but this back-of-the-envelope calculation shows that the tariffs proposed so far are not a game changer for US inflation.

China will be cautious in its response

China will not be hurt much by a steel tariff, as the US imports very little steel from China. However, China could choose to come with some countermeasures and, for example, put tariffs on grain imports from the US and it could also pull back from part or all of the USD250bn of trade deals it offered Trump during his visit in November last year. However, we believe China will be cautious as it is not interested in a big trade war. At the same time, though, it will show the US that protectionist measures will come at a cost. Clearly, China would also be disappointed by the tariffs, as it has done a lot over the past two years to reduce the overcapacity in the steel industry (the big dumping of Chinese steel took place in 2014-15 when the Chinese construction sector was in a huge downturn). As a result, steel prices have more than doubled over the past two years to the highest level since 2012. China announced two years ago that it would aim to cut steel capacity by 140m tonnes from 2016-2020, corresponding to 15% of total capacity. By 2017 it had cut 115m tonnes and had met 80% of the target set for 2020 already. At the ongoing National People's Congress, Li Keqiang announced in his Work Report that China aims to cut steel capacity by another 30m tonnes in 2018. If implemented, the total amount of capacity cuts would actually reach 145m tonnes and exceed the target of total cuts by 2020. Hence, China has clearly stepped up measures to deal with the overcapacity problem.

Should the trade war escalate, China could hurt the US in the areas of soybeans and aircraft, which are the two biggest US export groups to China (see table on page 6). It is quite easy to substitute Boeing airplanes with Airbus. Soybeans can also be bought from other countries. That said, the trade flows between the US and China are large and it would hurt both economies if the situation escalates. We have dived further into the US-China trading relationship in the appendix on page 6.

Another possibility is that China will slow down US treasury purchases, as was talked about in January, see Flash Comment: US-China relations on a concern path – part 2, 11 January 2018. Back then it was likely a warning that China has the tools to hit back at protectionist measures from the US and now that the US seems to be on a more protectionist path, the probability of this happening has increased, although it is not our base case. US Treasury yields moved higher on the story.

US is investigating theft of Intellectual Property Rights

In an interesting story, Bloomberg writes the next step for the Trump administration is to target China by imposing tariffs on Chinese imports and limiting Chinese investments in US businesses. It is not surprising that Trump wants to target China, as the US runs the largest trade deficit with China and with the ongoing investigation of Chinese theft of intellectual property rights (initiated in August 2017). Still, it is noteworthy that the story is more concrete than we have seen before. For instance in the most severe scenario, the US could impose tariffs on imports of for instance Chinese-produced clothing and electronics, according to the story. Both account for a large share of US imports from China (see appendix page 6). On the investment sides, the US may limit or prohibit Chinese mergers and acquisitions of US companies based on 'national security concerns', especially for sectors, where US companies cannot access the Chinese market. The investigation on China is expected in the coming weeks. As with tariffs on steel and aluminium, we expect any measures taken against China to be small in magnitude, meaning this is more about politics than economics. There is a risk we are being too optimistic and that we are heading for a full-blown global trade war.

Trump has also started to use the Taiwan card, which angers China. Trump has just signed a law aiming to encourage official visits between the US and Taiwan, which a Chinese Foreign Ministry spokesman said 'severely violated the one-China principle', see China Daily. The Taiwan issue could add to provoking China into retaliation. So far, though, China has kept calm but given how sensitive the Taiwan issue is in China, it may add to China's wish to strike back at the US in the trade area.

EU 'can also do stupid' but retaliation is of small magnitude

EU has signalled clearly it will retaliate to US tariffs and EU Commission President Jean-Claude Juncker has said the EU 'can also do stupid'. According to Bloomberg, the EU is considering to implement tit-for-tat tariffs of 25% to USD3.5bn of US goods (corresponding to 1.2% of the total US goods exports of USD384bn to EU). Tariffs on Harley Davidson motorcycles and Kentucky Bourbon, produced in home states of leading Republicans, have been mentioned, which was how the EU responded to George W. Bush's tariffs on steel in 2002, when the EU also targeted specific products in order to punish specific politicians.

The retaliation measures are unlikely to do much damage to the US economy (something US Commerce Secretary Ross has also touched upon) and are also symbolic. That said, a harder stance on trade policy fits well with French President Emmanuel Macron's view on trade, as he is actually quite protectionist himself. Macron has on several occasions pushed for a tougher trade policy strategy, see e.g. Financial Times.

There are divergent opinions among the EU member states and we think it is noteworthy that the Danish finance minister in a tweet warned about EU retaliation, as it would hurt the EU economy and EU citizens. While Denmark is obviously a small EU country, it supports our view that the EU is unlikely to implement very tough measures against the US, as there is a risk that Trump would counter the EU's move by increasing tariffs on European cars, for instance. The European economy is strong and while the acceleration phase is likely over, we expect growth to remain strong and the symbolic US tariffs do not alter this view.

NAFTA discussions on a concern path

Trump's decision to impose tariffs on aluminium and steel imports is also important for the ongoing NAFTA negotiations, as Canada is one of the main exporters of steel to the US. While NAFTA has a 'national security exemption', both Canada and Mexico think Trump's tariffs are misusing the exemption. The tariffs are likely making it more difficult to reach a compromise and Trump has tweeted the US needs concessions in order to exempt Canada and Mexico from tariffs on steel and aluminium. Trump wants better access to the Canadian market for US farmers and wants Mexico to do more to stop drugs passing the US-Mexico border. In this sense, it seems like Trump is following the same strategy as when he made NATO countries spend more on defence: making big threats in order to get concessions ('mad man' strategy).

The seventh round of the NAFTA negotiations ended a couple of days ago and at the moment the three countries have not announced dates for the eighth and final round. Progress in the negotiation is slow as only six chapters of the NAFTA agreement have been closed and there are still 24-27 to go. In addition, campaigns for the Mexican federal election are expected to begin soon, which may slow talks further. The Mexican election takes place on 1 July 2018 and the Mexican government fears that it will lose to left-wing nationalists, making it difficult for them to compromise.

If Trump wants to pull out of NAFTA, Congress may be able to prevent a total withdrawal since it ratified and implemented the agreement through legislation. The Congress can also pass new laws that give it greater authority over trade agreements. If Trump vetoed those laws, it could lead to a rupture with the Republican Party. Besides, the Congress could possibly form a veto proof majority by a two-thirds supermajority of both houses. If the US withdraws from NAFTA, the US and Mexico would return to WTO standards, while the US and Canada may resuscitate the previous US-Canada FTA. The US may seek bilateral deals with both countries instead.

US protectionism is dollar negative

As discussed in Strategy: Push for a weaker USD supported by flows, Trump's accelerating his protectionist agenda is easily reconcilable with his highly fiscal expansionary policies and the talk of the virtues of a weak dollar voiced by Treasury secretary Mnuchin early in the year. While the current mix of fiscal and monetary policy policy is set to remain USD negative, see Part 5: FX and inflation - US inflation outperformance + comfy Fed = weaker USD, we further note that the hegemony status of the USD – and hence possibly its safe-haven properties – have been up for revision for a while, and Trump's trade rhetoric is accelerating that process. Currency-reserve flows take time to shift but a decline in the lure of US assets at a time when the US has to issue more bonds to finance the twin deficits could be critical. In an FX context, we deem that the associated upward pressure on yields will do little to outweigh the negative effects of the current US policies on the USD.

In our base case that the Trump administration introduces protectionist measures on a case-by-case basis, we believe the near-term USD weakness trend would abate somewhat, and EUR/USD should stay in the 1.21-1.26 range for now (but still edge higher as the ECB continues its path to 'normalisation').

In a risk scenario where an actual trade war breaks out, e.g. with the US leaving the WTO, global risk sentiment is likely to take a firm hit and it is less clear whether the traditional safe-haven status of the USD would still be in place and support the dollar. We think however that the associated hit to US growth will dominate any flight to US 'safety' in that case, and foresee a weaker USD in that outcome too.

Appendix. US trade with China

As there is a risk that we are heading for a global trade war, we have dug into the goods trade flow between the US and China. In 2017, the US exported goods to and imported goods from China for a total of USD130.4bn and USD505.6bn, respectively. The trade deficit was USD375bn or 2% of GDP. The large trade flows mean that a trade war between the two biggest economies in the world would be damaging for both sides and this is the main reason why we do not think it is going to happen. US consumers would experience higher prices (and smaller supply of goods) in case of tariffs or import quotes. China would be hurt, as the US is the most important export market for China (lower exports and lower employment).

The US main goods exports to China consist of the following.

• 'Crude Materials Inedible except Fuels' (mainly soybeans).
• 'Chemicals and related products' (pharmaceutical products).
• 'Machinery and transport equipment' (mainly motor vehicles and aircrafts).

The US mainly imports the following goods from China.

• 'Manufactured goods classified chiefly by material' (textile yarn and manufactures of metals).
• 'Machinery and transport equipment' (mainly electronics like computers, televisions, smartphones etc.).
• 'Miscellaneous manufactured articles' (toys, apparel and clothing and furniture).

EUR/USD

Current level - 1.2426

The bias here is bullish above 1.2360, for a test of 1.2460, en route to 1.2550.

USD/JPY

Current level - 105.60

The test of 106.50 resistance failed and a break through 105.20 will signal a renewal of the downtrend, towards 104.30.

GBP/USD

Current level - 1.3900

The uptrend is still intact, with an intraday support at 1.3860 and there is a risk of another leg upwards, to 1.3970 dynamic resistance. Crucial on the downside is 1.3815 and a violation of that low will signal a slide towards 1.3620.

The Euro remains supported on Wednesday, holding in green for the fifth straight day and establishing above broken 1.2400 barrier (Fibo 61.8% of 1.2555/1.2154 descend).

Strong rally on Tuesday, which was sparked by news of Koreas’ summit, generated bullish signals on break above 30SMA (1.2354) and marginal close above next target at 1.2400.

Bullish setup of daily MA’s is supportive, but overbought slow stochastic and 14-d momentum heading south in negative territory, warn of further hesitation at 1.2400 zone and possible deeper pullback.

EU Q4 GDP data are the key release for the single currency in the European session, with release of US ADP private sectors employment data, due later today, also being in focus.

Eurozone’s economy is expected to grow at unchanged pace in Q4 and maintain strong growth, as Q4 forecast and Q3 GDP stand just under multi-year high.

EU economy is expected to grow by 0.6% q/q and 2.7% y/y, with firm release today expected to further boost the Euro for test of next targets at 1.2460/87 (Fibo 76.4% / 20-d upper Bollinger band).

Corrective dips are expected to hold above broken 30SMA to keep fresh bulls intact.

Res: 1.2433, 1.2460, 1.2487, 1.2500
Sup: 1.2400, 1.2354, 1.2331, 1.2310