CAD
Not unsurprisingly given market tendencies, the loonie has seen some relief on the partial suspension of US tariffs. That said, as we note in our USD section above, this largely misses the point when it comes to the overall picture. Higher tariff barriers warrant the dollar strengthening against the loonie. So, while the initial knee-jerk reaction is to see USDCAD move lower, fundamentals still point towards longer-term climb for the pair, barring any further easing in trade tensions.
USD
After several days of notable decline, the dollar appears to have stabilised for now, albeit with the DXY index left hovering just above 104 – a fall of more than 3% since the month began. Indeed, the greenback’s continued drop came despite a solid set of ISM Services prints yesterday, which not only beat expectations, but offered a notable counterpoint to the soft manufacturing prints seen earlier in the week. The other notable US event yesterday saw tariffs partially suspended on Canada and Mexico, with the US lifting some levies on auto imports. While at first glance, this could be seen as a further indication of the administration’s lack of seriousness when it comes to tariff threats, zoom out and the trend is still toward higher tariffs, and that we think is key. Put all this together, higher tariffs and better than currently expected growth leave the dollar scanning as cheap. While a turnaround might take some time, we continue to favour a stronger greenback in the medium term barring any pullback in the hard data – a fact that makes tomorrow’s jobs report a critical test of our view.
EUR
In many ways, it felt like yesterday marked a turning point for Europe. Gone was the fiscal restraint that has characterised Germany’s approach to fiscal policy in recent decades, instead being replaced by a commitment to spending vast amounts of money to boost investment and defence capabilities. Accompanied by similar moves to loosen EU spending rules, this left markets agog at the change in approach. No where was this more acutely felt than the bond market. 10Y Bunds sank, with yields rising 30bps on Wednesday, a move that has continued this morning too, adding a further 10bp through early trading today. For the time being, this rise in yields is proving positive for the euro, with the single currency having gained almost 4.5% so far this week against the dollar. But we also think a word of caution is needed here. The slide in German bonds has triggered similar moves across other European govvies – a story we think is worth keeping an eye on given the tricky fiscal situations facing countries like France and Italy. Debt sustainability should put a ceiling on the euro’s ability to continue rallying in the short term, albeit we may not have hit that level yet. We do, however, think these developments also change the focus of Lagarde’s post-ECB meeting press conference this afternoon. While the path forward for rates is still a focus, we will be watching closely for any comments on the risk of eurozone fragmentation.
GBP
Yesterday’s rise in Bund yields not only impacted other eurozone countries but had a knock-on effect for the UK too. Gilt yields also climbed – making an uncomfortable set of trade-offs facing the Chancellor this month, look all the more unappealing. Current reporting suggests that cuts to welfare spending will be used to make the numbers add up, a scenario that will upset Labour MPs. The upshot is that several weeks of negative headlines are likely to precede the March mini-budget, and that is not a positive for sterling. While euro strength should continue to offer some support for sterling valuations, we suspect the pound is likely to underperform on crosses.
This content was originally published by our partners at Monex Canada.