CAD
It has been a remarkable turnaround for the loonie. In the space of less than two days, USDCAD has managed to rise more than 3%, with markets pricing out tariff risk almost entirely by our reckoning. Short term, then absent any further tariff developments, this should leave USDCAD trading in limbo ahead of Friday’s jobs data, an outturn that looks set to disappoint. But longer term, we remain of the view that having secured only a temporary suspension of tariffs, some degree of risk premia is still warranted in loonie valuations. After all, we struggle to see how Justin Trudeau will be able to deliver a repeat of the theatrics that secured this most recent suspension. On top of this, the concessions needed to remove the tariff threat entirely are likely to be deeply unpalatable, challenging both the willingness of Canadian politicians to compromise, and likely necessitating a vote by a Parliament that is currently prorogued in anticipation of a general election. With this in mind, chronic tariff risk should weigh on the economy in the coming months at minimum, warranting cheaper loonie valuations in our eyes.
USD
With markets continuing to digest the suspension of US tariffs on Mexico and Canada yesterday, it was unsurprising to see the dollar give back some ground. The DXY index is now trading at 108, having started the week threatening to test the 110 mark. Absent a surprise, this should leave ISM services PMIs as the primary US-specific data event for today, albeit one we suspect will be discounted given the events so far this month, and the heightened uncertainty stemming from the new Trump administration. That should leave fed speakers as the most likely market movers this afternoon, with Barkin, Goolsbee, and Bowman all set to hit the airwaves. Our base case sees a continued hawkish pivot in rhetoric from the FOMC, which should put a floor under the dollar around current levels, leaving the greenback primed for a rebound as and when markets are reading to begin rebuilding tariff premia in currency valuations.
EUR
Industrial production data and final January PMI readings should be the main focus on the data front for eurozone traders today. That said, we suspect it will be the ECB’s wage tracker that garners the most attention when it is released at 09:00 GMT. The ECB has consistently set policy by looking in the rear-view mirror through this cycle. As such, while we are disinclined to place significant emphasis on this latest set of pay indicators, it still carries weight as a steer on the direction of travel for ECB policy. Indeed, this point should be hammered home this afternoon, with ECB Chief Economist Phillip Lane giving a speech to the Peterson Institute, which we suspect will at least touch on these latest wage readings.
GBP
With markets unconcerned for now about the risk of US tariffs, sterling traders can turn their attention back to tomorrow’s BoE decision, with a 25bp cut to rates the almost universal expectation. We agree with consensus on this occasion, leaving the focus for tomorrow’s announcement squarely on the accompanying Monetary policy report, and on any comments by Governor Bailey. All told, we suspect both will steer in favour of a further 75bps of easing this year, in line with prior guidance. While this would be more than the 55bps currently priced by markets, we doubt that this is likely to see a sharp sterling selloff, albeit this does pose a minor downside risk. Rather, we think a slow alignment with this view as the year progresses, should offer a modest headwind to a pound that should otherwise continue to benefit from constructive underlying fundamentals.
This content was originally published by our partners at Monex Canada.