CAD
USDCAD continues to buck the trend seen elsewhere across risk-sensitive FX, largely holding onto gains versus the dollar. This is even more surprising given the loonie’s typical sensitivity to North American equities and oil prices. The recent slump for both would ordinarily have been expected to weigh heavily, as would the results of yesterday’s Boc business outlook survey which painted a grim forward-looking picture of the Canadian economy. That said, firms did also point to inflation as a greater concern than growth, which is hawkish at the margin. It is also mistaken in our view, as is the level of complacency across markets over the risk of further tariffs. We continue to expect the loonie to soften as markets work through the full implications of US tariff impacts.
USD
Monday saw a roller-coaster day of price action, particularly for equities, though the session ultimately saw the S&P 500 end the day little changed, despite trading in bear market territory shortly after the open. This trend has continued through Asia this morning too, with the Hang Seng flat, and the Nikkei making gains of close to 6%. Meanwhile, similar swings were also seen across bond markets, with the US 10 Treasury trading in a 34bp range to start the week – with yields currently 18bps higher than last Friday’s levels. At the same time, Fed easing expectations now price 3.7 rate cuts for 2025, having projected 5 full cuts early yesterday morning. All this is to say, that FX markets have in some sense been remarkably stable, despite the cross-asset gyrations playing out. The DXY index finished Monday at 103.50, having gained 0.85% – a relatively large move given the lack of market data, but small in the context of price action across other financial markets. This, as we see it, leaves FX markets needing to play catch up, with both cross-asset pricing and fundamentals favouring a dollar that is stronger than current levels. So, while the DXY index has dipped again this morning, we think another light data calendar and plenty of focus on tariff risks should help see the greenback make further headway.
EUR
After emerging as one of the big winners from last week, the euro ended Monday trading largely flat against the greenback, despite a volatile session. We suspect a similar story is in store for today too. Having begun the day just north of 1.09, EURUSD is trading close to a full percent stronger on minimal news flow as of writing. Indeed, it is a little baffling to see both eurozone equities and the single currency trading stronger, despite little change in the tariff backdrop – the context remains a shakeup of global trade to which the EU is notably exposed. To us, that suggests downside risks from current trading levels in the very short term, with fundamentals also favouring a longer-term pullback for the pair.
GBP
GBPUSD continued to slip back on Monday ending the session just shy of 1.27. While this was more in line with a broader slide for risk-sensitive FX yesterday, the pound also stood out given comments from UK PM Kier Starmer. He suggested that instead of retaliating against US tariffs, the UK would offer fiscal support to affected companies. But he accompanied this with guidance that the government would not look to hike income tax, VAT, or National Insurance. That would imply whether loosening the government’s fiscal rules, or making some politically very challenging decisions. The first of these two options remains a notable concern for markets, seeing Gilt yields spike yesterday, and helping the pound to once again underperform. Our long-term view remains that UK fundamentals are better than markets currently price, now helped by tariff differentials, while the government will ultimately choose not to scrap their fiscal rules with the memory of Liz Truss still fresh in the mind. For now, though, with sentiment still in the driving seat, sterling looks set to continue trading under pressure.
This content was originally published by our partners at Monex Canada.