CAD
Somewhat to our surprise, the loonie was one of the big winners from yesterday’s trading session. USDCAD slipped from just shy of 1.44 to finish the day just north of 1.43. Granted, a rally in equities arguably helped this move, as did a series of headlines which if tortured, could be argued to favour some preferential tariff treatment for Canada. Even so, given the relative exposure of the Canadian economy to US trade, we find yesterday’s price action hard to justify. But if we are right, that simply leaves USDCAD at risk of a sharp snap back later today, with our bases case expecting just that, and seeing credible risks that the pair could hit 1.50 if a maximalist set of levies is ultimately unveiled.
USD
Choppy Tuesday trading saw the dollar ultimately end the day broadly flat as markets braced for “Liberation Day”. Regarding what to expect, Trump is expected to finally unveil his reciprocal tariff policy at around 21:00 BST, albeit with reporting overnight suggesting that the final details are still to be worked out with the announcement now just hours away. Consensus, however, is leaning toward a roughly 20% tariff on most imports. That would represent a huge rise in the average tariff rate charged, and much larger we suspect, than markets are currently positioned for. While some tariff premia have opened up across dollar pairs in recent days, this remains some way off the magnitude we expect if Trump delivers on headlines. That should leave dollar risks skewed sharply to the upside through the remainder of the week, first on tonight’s announcement shock, and then as traders progressively price out hopes for administration flip-flopping.
EUR
In a mixed session for G10 currencies, the euro slipped yesterday as a combination of softer-than-expected domestic inflation and US tariff risks conspired to weigh on the single currency, with the pair dipping 0.3%. This latter dynamic should remain in the driving seat until the end of the week too, given the potential impact of tonight’s announcements. We continue to see risks skewed to the downside for EURUSD, in keeping with our broader macro thesis for tariffs. More to the point, we see elevated risks of an explosive downside move, with options positioning suggestive that traders remain positioned for a relatively benign outcome.
GBP
Cable largely held its ground on Tuesday, despite the tariff risks looming on the horizon. That said, we think it is only a matter of time before the pair nosedives if today’s tariff announcement matches our expectations. We have long been of the view that where import levies alone are concerned, the UK remains relatively more insulated than some other economies, most notably the EU. But last week’s Spring Statement introduces a further complication that is likely to weigh on the pound. Specifically, a US import levy on the order being discussed would likely eliminate all of the Chancellor’s £9.9bn of fiscal headroom. And, that is before accounting for the recent rise in Gilt yields. The climb that has taken place since the OBR closed their forecast window should have already eroded headroom by roughly £5bn. Barring any surprises, that will leave Rachel Reeves with another fiscal black hole to fill in the Autumn. The unpleasant political math that this implies is unlikely to escape attention for longer either, a dynamic that should weigh on sterling over and above what would be expected from just the direct impact of tariffs.
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