CAD
After trading north of 1.44 for much of the morning, USDCAD slipped back after lunch, helped by CPI readings that were somewhat hotter than they initially appeared. Markets had expected aggregate inflation to stabilise in December at 1.9% YoY, while core-median and core-trim CPI growth were both projected to ease 0.2pp to 2.4% and 2.5% respectively. On this score, the latter readings met expectations while headline inflation actually undershot, albeit marginally, to land at 1.8% YoY. Admittedly some disinflation had been widely anticipated due to a sales tax holiday in December. Interestingly though, this appears to have had much greater pass-through than many had predicted. Weighing against that, however, we had thought that an uptick in consumer demand stemming from fiscal support for consumers posed risks of an overshoot relative to expectations – this too appears to be the case as we read the data. In short, the two policy tweaks seem to have netted out, but markets are taking their steer from the latter for now, prompting some loonie strength. Given that both measures are temporary, however, we expect this uptick will be short-lived. As we warned in our recent loonie outlook – the December data would see a false dawn for the Canadian economy – but it is tariffs that will really matter.
USD
Once again it is headlines from the White House overnight that are front of mind for markets this morning. On this occasion, Trump has threatened to implement tariffs on Chinese imports, beginning in early February. That said, unlike his prior suggestions directed at Mexico and Canada, this latest volley is having only a muted FX impact. The DXY index continues to trade just above 108, more than a full 1% down on the week so far. As we have previously noted, however, markets appear to be taking too much comfort from some of the rowing back of tariff rhetoric in recent days. After all, a lack of day-one tariffs is very different to no tariffs at all, even if the lack of concrete announcements to date plays to market scepticism surrounding Trump’s import levy threats. With this in mind, we continue to think the dollar will retrace higher as the end of the month approaches, albeit this move may require a catalyst, and on that score, next week’s FOMC meeting where we expect a hold in rates looks the most likely candidate.
EUR
Lagarde’s speech at Davos should be the major eurozone event of the day, with EURUSD lacking direction through early trading. Admittedly, if the ECB President sticks to her usual script, the event should be a snoozefest, with little meaningful detail on offer. But given headlines out of the US in the past few days, we can’t help but see increased risks that Lagarde says something interesting regarding trade risks and tariffs. More to the point, we think if she does, she likely skews dovish, which should help put a ceiling on EURUSD ahead of next week’s central bank meetings.
GBP
Yesterday’s UK labour market data failed to meaningfully move the needle for sterling, with cable once again trading in line with broad dollar moves. This morning looks little different, despite a predictably disappointing set of government borrowing figures, with increased rates unsurprisingly leading to a deterioration in the public finances. This once again prompted an appearance by Chancellor Rachel Reeves on Bloomberg – a move that hardly smacks of government confidence. Unlike her appearance before Christmas, however, this latest interview has not yet triggered a selloff for the pound in a sign that markets may be taking a more sanguine view of recent market dynamics and what they actually say about the UK economy.
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