CAD
Despite having no direct impact on Canada, last night’s tariff suspension saw the loonie continue to pick up support, leaving USDCAD more than 1% stronger on the day. That trend has continued this morning too, with the pair now closing in on 1.40 as markets draw implications when it comes to Canada’s own tariff prospects. We remain of the view that markets remain complacent when it comes to Canadian tariff risks. But short-term momentum is likely to favour USDCAD downside ahead of this afternoon’s US CPI print.
USD
The big news overnight once again came from the US, with President Trump walking back some of his recent tariff rises. It now appears that the reciprocal element of the Liberation Day tariffs will be suspended for 90 days across countries that did not retaliate, meaning that almost all will default to a 10% baseline. China, however, remains an exception, now subject to a 125% tariff. Crudely applied to historical trade data, this would actually represent a rise in the average US tariff rate charged on imports relative to initial Liberation Day rates. This, of course, does not account for the fact that facing such charges, US-China trade will crater. This leaves us with several key takeaways. First, we now have more clarity on the President’s reaction function, given that last night’s reprieve appears to have been prompted by emerging signs of bond market dysfunction. Second, the trend for tariffs remains toward higher rates – a fact markets seem to have largely overlooked again. Third, this story is unlikely to be over yet, but for now, many of the downside risks facing the US economy have moderated, even as inflation pressures should remain elevated.
In any case, markets welcomed last night’s news. The S&P 500 climbed 9.52%, the largest single-day gain for the index since 2008. The dollar also rallied, though the DXY Index remains sub-103 this morning, showing signs of scarring after the drama of the past week. Even so, we continue to see risks skewed toward dollar upside. The risk of a major market blowup is diminished, and downside risks to US growth have moderated, even as the tariffs that remain in place will still add to inflation, a point that should garner some attention today with March CPI data due this afternoon. That will warrant a more hawkish Fed than currently priced, with US rates set to be a supportive factor for the dollar in the coming weeks. Additionally, a back-of-the-envelope calculation suggests that tariffs will still raise additional revenue in the ballpark of $300bn. That should be enough to keep proposed tax cuts on track, which should prove growth-supportive later this year.
EUR
Having been one of the big winners of the past week, EURUSD has unsurprisingly given back some recent gains overnight, even though the suspension of a 20% reciprocal tariff rate will be warmly welcomed in Brussels. That said, we think this overlooks the fact that a 10% tariff remains in place, and with EURUSD trading at current levels, that still implies a negative growth impact for Europe with minimal inflation upside, posing downside risks for the euro. Moreover, the imminent death of US-China trade remains an underpriced dynamic for Europe. This leaves Chinese goods exports looking for new markets now that the US is no longer an option, with growing risks that the EU will impose its own tariffs to moderate any increase in flows.
GBP
A fading euro haven bid also helped GBPEUR to notch some notable gains yesterday evening, with the cross rallying from the mid-1.15s to trade above 1.17 this morning. Domestic events should continue to play second fiddle for the pound today too, with a speech by the BoE’s Breeden the only event of note. Given our base cases for both the euro and the dollar, that should favour sterling gains against the former, and weakness versus the latter today, as markets continue to parse this latest round of tariff news.
This content was originally published by our partners at Monex Canada.