CAD
Monday saw a roller-coaster start to the week for loonie. After threatening 1.48 in the early morning, USDCAD ended the day trading a 1.44 as news broke that Trump would temporarily suspend his 25% tariff on Canadian goods. As we see it though, any celebrations look somewhat premature. The Canadian government will likely have to make much more onerous concessions to ensure that the tariff threat is lifted permanently, and this appears far from a done deal to us. With this in mind, we would not be surprised to see another re-run of this recent drama in a few weeks, with risks that the next go around does not result in a deal for US tariffs to be suspended yet again.
USD
After announcing tariffs on Mexico, Canada, and China over the weekend, 11th-hour negotiations saw Trump step back from the brink yesterday afternoon, suspending a 25% import levy on Mexican and Canadian goods for a period of 30 days. In Mexico, this required President Sheinbaum to commit a further 10,000 troops to border security, while Canadian PM Justin Trudeau promised to appoint a fentanyl czar with a budget of C$200m. As we see it, both are expensive acts of political theatre rather than meaningful concessions, with Mexico and Canada likely needing to do somewhat more to have the threat of tariffs permanently lifted. For now, though, yesterday’s developments very much play into the broad market bias that favours viewing tariffs as a negotiating tactic rather than a serious threat. We are not so sure, but for the time being at least, markets are discounting tariff risks, a dynamic that has seen the DXY index fall 1% from yesterday’s high.
Underpinning our view that tariff risks should not be entirely discounted is the fact that China has still found itself on the wrong end of US import levies. Unlike Canada and Mexico, there does not appear to have been any US-China negotiations, with the US imposing a 10% levy on Chinese imports, and with China retaliating in turn. We are inclined to think this set of measures will be sticky too – for China, the optics of being bullied into concessions by the US would be deeply uncomfortable. Moreover, we think the eurozone is likely in a similar boat in the coming months, not to mention, that some broad import levy still looks necessary in order to make the fiscal sums add up. With this in mind, we continue to think that the dollar should strengthen moving forward, but likely somewhat slower than we had previously anticipated given events overnight, and market willingness to price out tariff concerns in the short term.
EUR
While the euro has found some relief from yesterday’s round of tariff suspensions, EURUSD is still only trading around 1.03, continuing to factor in a degree of tariff risk. To us that makes sense. After all, the eurozone looks next up on Donald Trump’s hit list, a point emphasised by a story in the Telegraph that hit the wires yesterday afternoon. That said, in the short term, these most recent developments do leave our call for EURUSD parity looking like more of a stretch. While we still think a test of parity is more likely than not, we now suspect this will need Trump to announce tariffs specifically targeting the EU, with such a move only coming in April under our base case.
GBP
It was a good start to the week for the pound – clawing back initial losses versus the dollar and gaining close to 1% against the euro as markets increasingly factored in differential tariff exposure to sterling valuations. This is very much in keeping with our long-standing thesis for the pound. Namely, relative insulation from tariff risks, solid but not spectacular domestic growth and a slow easing for Bank Rate should all be factors that favour sterling outperformance versus the euro. While markets were disinclined to take a similar view to start the year, recent events have seen traders reengage with this perspective. We think this has further to run too, despite a modest pullback for GBPEUR this morning as markets breathe a sigh of relief on US tariff threats.
This content was originally published by our partners at Monex Canada.