CAD
One currency that deservedly made gains overnight was the loonie. USDCAD has slumped 1.2% relative to pre-announcement levels. This makes sense to us given that Canada, along with Mexico, was carved out of last night’s tariffs. While that does not mean they are off the hook, nor is either country facing the acute risks now in scope for pretty much every other US trading partner. We remain of the view that further tariff rises are coming for North America. But for now, at least, we expect the loonie to outperform our forecasts given overnight developments.
USD
We have previously suggested that markets were likely underestimating the magnitude of tariffs set to be announced on April 2nd. But, we did not expect to see headline levies of the size announced by Trump last night. In terms of the details, it appears there will be a 10% levy on all imports, excluding those from Canada and Mexico, that will go into force on April 5th. This will then be followed by a further rise in tariffs for those countries deemed to be trading unfairly with the US, set to be introduced on April 9th. While this has been called a reciprocal tariff, it is anything but, at least in the commonly understood sense. This additional levy has been calculated as half of the US trade deficit with a country, divided by US imports from that country. That leaves China facing a further 34% rise in US import tariffs, 20% for the EU, and 24% for Japan. Granted, it also appears that around one-third of US imports subject to sectoral tariffs will be excluded, but even so, this is a significant rise in aggregate US tariff rates.
Given this, it is somewhat surprising to us that the dollar has fallen overnight – the DXY index is now trading close to 1.5% lower than it began Wednesday morning. Domestically, some initial estimates suggest that these tariffs could boost inflation by 1-1.5% in 2025. That leaves expectations for between 3 and 4 Fed rate cuts through the remainder of the year looking over-optimistic, even as a greater-than-expected hit to growth elsewhere would favour more aggressive central bank easing. Granted, some have pointed to the fact that countries could potentially negotiate down any tariff rate, and the delayed implementation may have given markets comfort. We are sceptical here too. There does not appear to be an avenue to negotiate on baseline levies. And when it comes to reciprocal tariffs, the method used to calculate these rates offers little indication that a compromise can easily be reached. As such, we are inclined to look through the initial dollar softening for now, expecting a rebound as the full impact of yesterday’s event becomes increasingly apparent.
EUR
The overnight euro optimism looks distinctly puzzling to us. At 20%, the announced tariff rate comes in toward the higher end of expectations, and we are sceptical that the EU would be at the front of any negotiation queue, given Trump’s well-documented disdain for the bloc. As such, we think any optimism stemming from delayed tariff implementation is likely to fade over the coming days, leaving the initial knee-jerk move higher only a temporary blip. Granted, it has been a large one, with EURUSD rallying through 1.10 through early morning trading, representing a roughly 2% rally in just 24 hours. We think this is overdone, given our macro base case. Albeit, any EURUSD retracement lower may take some time to play out, needing negotiation hopes to fade, and the full impact of last night’s events to become clear.
GBP
While sterling has largely tracked the euro higher against the dollar through this morning, with cable now trading just shy of 1.32, we have had questions as to why the pound has failed to outperform. After all, the announced tariff rate for the UK was just 10%, and a lower rate relative to the EU should, in isolation, warrant a stronger pound versus the euro. But, we think a rise in US tariffs on the UK of the magnitude seen last night is also likely to make for some pretty uncomfortable fiscal math in the UK. In fact, the resulting hit to growth likely means that all the Chancellor’s headroom from the Spring Statement has now disappeared – and when fiscal concerns come to the fore, sterling normally underperforms its typical sensitivities. As such, we continue to see tactical downside risks for sterling on the horizon, both against the euro and the dollar.
This content was originally published by our partners at Monex Canada.