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China Caixin PMI services dropped 0.5 to 54.2 in February. Key points are:

• Softer increases in activity across both the manufacturing and service sectors
• New order growth slows at services companies, but picks up at manufacturers
• Input price inflation subsides

Summary:

• Australia TD securities inflation Feb: -0.1% mom, prev 0.3% mom
• Australia buidling approvals Jan: 17.1% mom, forecast 5.0% mom, prev -20.6% mom. Release.
• China Caixin PMI services Feb: 54.2, forecast 54.3, prev. 54.7 Release.

Angela Merkel secured her fourth term as Chancellor of Germany. Members of the Social Democrats voted for the coalition deal with Merkels' CDU/CSU. Months of political uncertainty has now ended. The SPD's vote results were overwhelming, with 66% supporting, and only 34% rejecting.

In Italy, based on the early vote counts, there will be no clear winner in the election. Center-right coalition of former Primer Minister Silvio Berlusconi is heading for a win in the election, but falls short of a majority. That means, it will take weeks of negotiations before a government could be formed. Anti-establishment Five Star movements to come in second place. Center-left coalition by the governing Democratic Party will come in third.

Euro has little reaction and is steady.

White House Director of the National Trade Council, Peter Navarro commented on Trumps' tariffs on Sunday:

• Exemptions and exclusions are different
• "There'll be an exemption procedure for particular cases where you need to have exemptions so that business can move forward."
• " At this point in time, there'll be no country exclusions."
• "As soon as he (Trump) starts exempting countries, he has to raise the tariff on everybody else."
• "As soon as he exempts one country, his phone starts ringing with the heads of state of other countries."

Trump is expected to formally sign an order for the 25% tariff on steel and 10% on aluminum this week.

STOCKS

Dow (24538.06, -0.29%) has support in the 24000-23600 region which is likely to test in the coming sessions. The support as visible on the 3-day candle chart is likely to hold in the medium term, pushing back the index towards 25200 again. But for now the index looks bearish towards 23600.

Dax (11913.71, -2.27%) is almost at the medium term horizontal support on the weekly candles. While the support holds, the index may have some scope of moving back towards 12400 and higher in the medium term; else a break below the current weekly support could indicate a fall towards 11400 soon.

Nikkei (21043.61, -0.65%) is trading just above the important support near 21000. If that produces a bounce, the index may well head back towards 22500; else could come off gradually towards 20000. Keep an eye on price action at 21000.

Shanghai (3240.39, -0.43%) is holding well below resistance near 3350. Also there is current resistance on the daily candles near 3270. While this holds, the near term view for the index is bearish towards 3150-3100.

Nifty (10458.35, -0.33%) is likely to trade within the narrow 10560-10380 region looking at the daily candles but there is enough room on the upside if the medium term channel support near 10400-10380 holds and pushes the index back towards 10800 or higher. Similarly,Sensex (34046.94, -0.40%) could also bounce back towards 35000 in the near term.

COMMODITIES

Brent (64.62) and WTI (61.48) are trading lower. WTI is likely to trade in the 63-59 region in the coming sessions while Brent could move up towards 66 again with a possible downside of 63. Some upmove is possible this week towards 66 and 63 respectively.

Gold (1326.40) is trying to move up again towards 1340 levels while above 1310. Near term looks bullish to sideways.

Copper (3.1280) moved down sharply but has paused above support near 3.07. While the price remains above 3.10, it my move upagain towards 3.20

FOREX

After 2 weeks of Dollar strength, the American President's 'trade wars are good' comment late last week (along with plans of imposing new tariffs on US imports of steel and aluminum) has again weakened the Dollar.

The Dollar Index (89.93), as per our prediction in the morning briefing on 1st March, tested resistance near 91 (by seeing a high of 90.93) and has subsequently dipped from there. There is immediate support for the Dollar Index at current levels – provided by the 13 days and 21 days moving average lines on daily line chart and also by the 5 weeks moving average line on the weekly line chart. On the daily candles, the next support is seen to be near 89.75. If the index breaks these supports, it could signal the beginning of another bearish phase for the Dollar.

The Euro (1.2321), exactly as per our prediction, bounced from support near 1.215 and is now headed back towards levels near 1.25-1.26. However, some resistance could be provided by the 21 days moving average line on the daily line chart near current levels. If it breaches this moving average line, we could expect it to move up towards 1.25 soon.

Dollar-Yen (105.52) broke crucial support near 106.5 on 3 day line charts and is now headed towards support near 104.50-104.75 on the daily candles. On the weekly line chart, we see lower support near 103.75, which could be another crucial long term support level, whose break will confirm medium term bearishness.

The Euro-Yen (130.01) has seen lows near 129.7-129.8 and might now test support on daily candles near 129.5 any time this week or next week. With Euro expected to gain some more strength against the Dollar this week, the test of 129.5 might not happen immediately.

Pound (1.3788) against our expectation of a test of 1.36, seems to be bouncing from support near 1.3775 on the daily candles. If this support continues to hold, we might see Pound move back up towards 1.4 over the coming sessions.

Dollar-Rupee (65.175): Support at 65.00-64.90. Can bounce to 65.40-60-70.

INTEREST RATES

US 10 Year Yield (2.84), US 30 year Yield (3.1234), US 5 year yield (2.596), US 2 year yield (2.22) : US Yields have all dipped further, which might be a result of investors moving away from equity towards debt post Trump's 'trade war' comments. The first half of March might just see muted movement in US yields. 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.)

Key Highlights

• The Euro formed a major bottom around 1.2155 against the US Dollar, and recovered sharply.
• There was a break above a crucial bearish trend line with resistance at 1.2280 on the 4-hours chart of EUR/USD.
• The Michigan Consumer Sentiment Index in Feb 2018 posted a decline from 99.9 to 99.7.
• The Euro Zone Services PMI for Feb 2018 will be released today, which is forecasted to remain at 56.7.

EURUSD Technical Analysis

After a major decline this past week, the Euro found support near 1.2150. The EUR/USD pair started a sharp upside recovery and traded above the 1.2250 resistance area.

The upside move seems to be positive and if the pair gains momentum above 1.2350, there could be further upsides in the near term.

EURUSD Technical Analysis Euro US Dollar

During the upside move, there was a break above a crucial bearish trend line with resistance at 1.2280 on the 4-hours chart. The pair also broke the 50% Fib retracement level of the last decline from the 1.2355 high to 1.2154 low.

The past few candles are mostly green, which suggest a short-term trend change in EUR/USD above 1.2250. On the downside, supports are at 1.2280 and 1.2250.

If the pair continues to move higher, then a break above 1.2350 could push the pair towards the 1.236 Fib extension of the last decline from the 1.2355 high to 1.2154 low at 1.2402.

Overall, it seems like the US Dollar is under pressure. This past week it declined sharply against the Japanese Yen as the USD/JPY pair traded below the 106.20 support levels. The pair may continue to decline as it is currently in a bearish zone below 106.50.

Economic Releases to Watch Today

• Germany’s Services PMI for Feb 2018 – Forecast 55.3, versus 55.3 previous.
• Euro Zone Services PMI for Feb 2018 – Forecast 56.7, versus 56.7 previous.
• US Services PMI for Feb 2018 – Forecast 54.6, versus 55.9 previous.
• US ISM Non-Manufacturing Index for Feb 2018 – Forecast 59.4, versus 59.9 previous.

Elections two ways

The two-pronged political risk has apparently come and gone

The SPD was expected to vote yes for another grand coalition, and the results confirm as such – a clear majority of 66.02%.

In Italy, the most likely scenario for a hung parliament came to fruition. Dealers continue to treat the Eur like hot potatoes not sure where to go given the Italian politics is headed for gridlock.

The results are initially interpreted as mildly supportive for the Euro given the worst case scenario, the Anti-establishment/Eurosceptic coalition in office was averted but is reversing out the initial wave of positivity. The market remains extremely choppy. Keep in mind upward momentum should be muted ahead of this weeks ECB meeting so the market will look to fade upticks given the political malaise in Italy will play on.

Trumps Tariff Torpedo

To say that President Trump proposed launching of tariff torpedo will sink the US dollar could be a huge understatement.

The President's proposed steel tariffs have tarred both free trade and a soft dollar policy with the same brush. No one expected the first stratagem to be as cutting with such wanton disregard for long-standing allies. Only days before Trump's tariff torpedo, Defence Secretary James Mattis put public pen to the paper urging the administration to consider tariffs targeted at specific countries and to focus on what he described as the underlying problem — Chinese overproduction.

With widespread reports that the President has ignored the advice of leading advisors, nothing can be ruled out at this stage. But given the international uproar, not to mention the market fall out; the President may consider dialling back on some of the rhetoric. However, hoping for cooler heads to prevail, might be far too optimistic given that President Trump promoted reforms of U.S. trade policies as a cornerstone of his election campaign.Even more so as the war of words escalated over the weekend when The President threatened to levy a tax on EU built cars that freely flow onto the US, in response to Jean Claude Junker threatening a tax on EU imported Harley Davidson motorbikes.

But tempering overall rhetoric, A top trade adviser to U.S. President Donald Trump said on Sunday a process would be in place for businesses to get exemptions from the White House plan to place steep tariffs on steel and aluminium, offering the first indication a tariff hike could be less broad than first thought.

As for the currency traders initial reactions, they are talking the talk and walking the walk realising that through US Trade tariffs; Trump is carrying the seeds of the dollar's destruction. The economic fallout from trade duties would result in a toxic elixir of lower domestic growth and higher inflation, neither of which inspires investors confidence in the dollar. But more significantly, as the soft dollar policy starts to erode the returns on US bond and equity markets, then the more vicious downward spiral takes hold.

When you consider that we may only be in the early stages of Tumps Trade Tirade, with far more critical decisions coming up on China abuse of intellectual property under section 301 of the US trade act, life in the markets could get incredibly messy.

Oil Markets

Steel tariffs brought concerns that US trade policy will dent economic growth, but this cause and effect is very unclear as the impact could be specific industry exemptions. But headline risk will continue to run extremely high so traders will stay on red alert.

Energy industry officials raised concerns about the tariffs on steel since the sector relies on imports for everything from pipelines to drilling equipment to liquefied natural gas import terminals.

None the less, it was a stressful week for oil markets as US exports fell, the dollar rose after incoming Fed chairman Powell's day one testimony, Libya reportedly increased supply and Iraq agreed in principle with Kurdistan on restarting Kirkuk pipeline. But more importantly, the upswing in US Shale production estimates continues to march higher.

If there was ever a compelling argument for OPEC and US shale producer to see eye to eye, now is the time. OPEC will host a dinner on Monday in Houston with US shale firms, at a time when US oil production is blasting through 10 million barrels per day. Sure OPEC and Non-OPEC alliance remain at record high compliance, but with Russia continually pressuring for an exit strategy, OPEC will look to offer an olive branch to US shale.Perhaps a universal realisation that all producer, OPEC and US Shale alike, need to tame a global oil glut could lead these long-standing Oil Patch Frenemies to work collectively towards similar goals, higher oil prices. As such, we should interpret any positive developments from the meeting as support for underly oil price sentiment.

Gold Markets

The Impact of the steel tariffs inflationary concern is tangible and could give cause for the Fed to raise interest rates four times this year. As far as Gold traders are concerned, however, the inflationary impact of trade war escalation will overwhelm the effect of higher US interest rates.And despite the prospect of higher US interest, it will not translate into a stronger due to inflationary concerns. So any escalation of trade wars will significantly dent the US dollar appeal, weigh negatively on US assets such as bond and equities and make gold the go-to hedge against rising US fiscal and political vulnerabilities.

Currency Markets

Look for USDJPY to carry the truncheon for the possible dollar demise led by speculative selling in JPY crosses while currency markets maintain an overall dollar harmful proclivity if US trade sanctions escalate

G-10

The Japanese Yen

Trade wars and geopolitical concerns are JPY-positive, as the market chases haven assets amidst growing uncertainty. Also, Kuroda signalled that the BoJ might start considering an exit from its extreme unconventional policy in 2019. If history tells us anything bout currency traders is that they will trip over one another at any hint policy normalisation as you can make three years of your trading budget riding the early wave. Such was the case of last years move on the Euro( 1.0600 to 1.2550) when traders surmised an ECB policy shift was afoot. Sure Kuroda suggestion is well down the road, but if we continue to get less verbal intervention from Japans currency regulators, it could be a signal the centeral bank is preparing the market for that eventuality. Indeed, allowing the JPY to carry the load during the early stages of squeezing financial conditions so that the fallout from YCC removal will be less market impactful. Also, we could see a growing appeal from global equity investors looking to build Japan exposure as Japanese corporates are clocking in record performances on relatively cheap equity valuation metrics, which could provide an added fillip to Yen sentiment. Of course, we know that currency markets seldom move in a straight line, but with the BoJ smoke signals looking ever so convincing, a bumpy move lower could be in the offing. Coincidentally, we have the BoJ rate announcement later in the week, and I'm sure Kuroda's follow up presser which should be fully subscribed by traders as its bound to filed some fascinating question this time around.

The Australian Dollar

The US 's international trade objective may see AUD underperform, but it would need commodity prices to fall off the ledge for a more profound move below the fundamental .7500 level.But the reality is that Trumps Tariff on metal prices could hike commodity prices.

And while the Aussie is running into some severe headwinds from the weaker than expected China PMI's, the hic-ups are most likely due to seasonal factors so it's far too early to downgrade China's economic growth which should continue to drive commodity prices higher.

Interest rate differential is having little effect on currencies, so we look for commodity prices and the broader US dollar narrative to drive local sentiment

The Aussie should remain well supported by 75-76 via global commodity prices while a move above 80 will be fleeting due to the contrary and negative domestic economic impact the backwards-looking economic data will show from the effect of a stronger A$

If you are looking for downside exposure on a commodity block trade, short CADJPY beckons.

The Canadian Dollar

If Trump emphatically holds firm, Steel Tariffs will all but derail NAFTA talks and given that this will throw longstanding homogenous cross-border trade upside down, CAD is the most vulnerable G-10 currency to Trump's tariff torpedo. Given the lack of enthusiasm over the latest GDP prints, while expecting the BoC to err dovish given the recent consumer data and US trade intentions, the market will be looking to build short CADJPY positions as trade war rhetoric escalates.

Before everyone maxes out on short CADJPY, it could be a ruse and little more than a trial balloon to gauge the equity market reaction, maybe wishful thinking).

Asia FX

The Chinese Yuan

In China, the first plenary of the National People's Congress( NPC) will be held, with significant state positions to be elected and the all-important 'term-limit' motion to be voted on.But the markets will remain overly focused on the global trade dynamics in the wake of Trump's tariff shocker. And both the CNY and USD will be the dominant focus this week given that the escalation of protectionist rhetoric. The mainland can stop this trade war rise dead in its tracks by releasing a symbolic a peace dove in the form of a lower tariff on imports from the US. Will the NPC provide the platform to offer this olive branch, only time will tell? With that in mind, reports are circulating that China is seeking high levels of meeting with the US to defuse trade tensions.

The Malaysian Ringgit

It's hard to envision Steel Tariffs derailing the underlying trends for the global economy. However, an escalation of an outright trade war could. From a regional perspective, the impact of the new Steel Tariffs will have a muted regional effect as China is not a significant supplier to the US markets. On this realisation, $Asia eased off the knee-jerk tariff reaction as higher yielding local bonds rallied as US Treasury yields collapsed with the Ringgit outperforming regional pairs on the back of foreign capital inflows.

However, if Trump does ante up his trade rhetoric, you can be sure that Asia lies squarely in his sights. But even in this environment, the MYR should be a relatively safer bet vs more prominent US export sensitive currencies like the KRW and TWD. Unfortunately, there is no playbook on how trade tariffs will play out and trying to understand the politics of trade wars even less comprehensible, but the Ringitt should hold up well relative to its regional peers

The market will quickly pivot to this weeks BNM, and while the new domestic inflation metrics give little cause for the bank to raise interest rates, traders will continue to focus on forwarding guidance. But at this stage, we're not expecting any upgrade on the centeral bank's monetary policy.

GOLD: The commodity looks to recover higher in the new week following its Friday positive close. On the downside, support comes in at the 1,310.00 level where a break will turn attention to the 1,300.00 level. Further down, a cut through here will open the door for a move lower towards the 1,290.00 level. Below here if seen could trigger further downside pressure targeting the 1,280.00 level. Conversely, resistance resides at the 1,330.00 level where a break will aim at the 1,340.00 level. A turn above there will expose the 1,350.00 level. Further out, resistance stands at the 1,360.00 level. All in all, GOLD looks to weaken further.

EURUSD: With the pair seeing higher price close the past week, more strength is envisaged in the new week. On the upside, resistance comes in at 1.2350 level with a cut through here opening the door for more upside towards the 1.2400 level. Further up, resistance lies at the 1.2450 level where a break will expose the 1.2500 level. Conversely, support lies at the 1.2200 level where a violation will aim at the 1.2150 level. A break of here will aim at the 1.2100 level. Below here will open the door for more weakness towards the 1.2050. All in all, EURUSD faces further bull threats on correction.

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