CAD
After a roller coaster 24-hours USDCAD ultimately trades little changed. The pair is hovering just shy of 1.43, with none of the Russia-Ukraine negotiations, US CPI, or BoC summary of deliberations proving decisive for the pair. A light data calendar today is unlikely to see much change for USDCAD. In our view, however, tariffs should still be the overriding factor that determines loonie performance in the coming month, and at current valuations, this risk has been minimally embedded in market pricing. As such, while we expect only relatively muted price USDCAD price action short term, with the pair set to continue being buffeted by cross winds, the medium-term outlook remains in favour of a retracement lower for the loonie.
USD
While it is news from the White House that is dominating headlines once again this morning, it is not new developments concerning tariffs, at least on this occasion. Rather, yesterday saw Trump announce that he had taken part in a call with Russian President Vladimir Putin, and that they had both agreed to start negotiations on ending the war in Ukraine. The result has been a kneejerk rally for risk-sensitive FX, with European currencies that were notably impacted by the 2022 invasion leading gains. We, however, would caution against rushing to judgment. Europe has largely disconnected itself from Russian gas, meaning that any peace deal is unlikely to reverse the economic damage caused by the war. Moreover, a deal that makes extensive concessions to Putin is hardly a long-term positive for European security. Even so, this news has largely overshadowed US CPI data published yesterday afternoon that saw hotter-than-expected core price growth of 0.4% MoM, and 3.3% YoY. All told this adds further support for our argument that the Fed is unlikely to cut rates this year, and, combined with events overnight, leaves the dollar scanning as unduly cheap in our eyes. Admittedly, PPI and initial jobless claims today are unlikely to offer much cause for reversal. But we do expect the dollar to make gains in the coming days and weeks as markets continue to assess development both at home and abroad.
EUR
EURUSD is one of the major gainers so far this morning. The pair is now trading above 1.04 as markets take comfort from the overnight headlines concerning Russia-Ukraine. We think this is overdone, for a number of reasons. First, we see little prospect that the supply of Russian gas gets turned back on. After all, that would only leave the rest of Europe hostage to further Russian aggression. Second, the potential gain from Russia as an export market is likely overstated. Trade via third countries between the EU and Russia has appeared to rise sharply since the start of the war, suggesting only minimal gains are likely from removing sanctions. Finally, the deal itself holds downside risks for Europe’s security in the longer term. Any deal sufficient to satisfy Putin is likely to leave him emboldened, hardly a net positive. Put all this together and we think the initial market reaction to this latest news misses the point, with markets likely to be underwhelmed by the details as they emerge in time. With this in mind, we continue to see downside risks to the euro in the short to medium term, despite the initial bias to take the single currency higher.
GBP
While Russia-Ukraine is the focus for many this morning, it was good news on the domestic front in the UK too. Q4 GDP readings proved better than expected, with the economy seen expanding by 0.1 %in the final quarter of last year. That has left growth for 2024 as a whole tracking at 1.4%, still a respectable performance when compared to European neighbours. It also means that the UK economy avoided contraction, which had been the market consensus expectation. That said, it was not all good news when looking through the details. Private consumption undershot expectations, flatlining in Q4, while gross fixed capital formation and business investment both slumped, down -0.9% and -3.2% in the same period. Instead, it appears that a 0.8% increase in government spending did much to support economic activity, an unsustainable method of sustaining growth in the longer term. It also leaves the Treasury with a headache too. Chancellor Rachel Reeves will still have hard decisions to make come March, with her fiscal headroom likely having evaporated based on these latest figures. As such, we see risks for sterling skewed to the downside over the coming month, even if our base case remains bullish on the UK based on relatively more favourable fundamentals when compared to the EU.
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