CAD
After bottoming out just north of 1.40 last week, USDCAD has clawed back some ground, trading in the mid-1.42’s as Europe begins to come online this morning. We think the pair has further to go in this direction too, with the loonie having largely escaped unharmed so far. This is despite the Canadian economy’s unique vulnerabilities to US trade disruption, to US economic growth, and the fact that the other shoe is yet to drop when it comes to USMCA renegotiation. All told these factors should bias USDCAD to the upside as the week progresses, albeit, this is likely to remain a bumpy ride, and subject to any further commentary from the White House.
USD
Tariffs are once again the focus to start the week, with little signs that the Trump administration was keen to back down over the weekend, and signals from the EU that they are set to join China in retaliating against US trade restrictions. For now, this impact is most evident across equity markets, seeing Aisa printing some pretty grim numbers this morning – the Nikkei is down 7.65% as of writing, while the Hang Seng has dropped almost 12%. Futures suggest a similarly worrying open for European and US stock markets too, which if sustained, could well see the S&P close in bear market territory this afternoon, triggering a further round of panic. Despite this, however, the dollar continues to deliver a middling performance, failing to pick up typical haven demand. But this relies on two legs, neither of which is likely to prove long-lived in our view. First, that the Fed can cut to offset any economic damage – markets presently price a base case of 5 rate cuts this year. This seems improbable to us given the upside inflation risks looming, a point that has been made across recent FOMC commentary. Second, that current events represent a US-specific shock, albeit with global consequences. However, American shocks tend to become broader global problems, leaving us to suspect that markets continue to underprice the spillover risks. All told, we think this leaves dollar risks skewed to the upside, especially if panic begins to take hold this week.
EUR
After briefly dropping into the 1.08s overnight, EURUSD is back around 1.10 as European trading gets underway. While not typically considered a haven currency, the euro is seeing a notable haven bid through recent events, due to the bloc’s large available pool of liquidity which makes the euro and European assets a natural alternative destination to the US, which for obvious reasons is not presently favoured by investors. While this makes some sense to us, the pair looks rich at current levels. This is doubly true after news overnight that the EU is intending to announce its own set of retaliatory measures, perhaps as soon as today. If this takes place, then we see short-term options for compromise as limited, meaning that tariff barriers between the US and EU are likely to remain sticky. But we think markets are yet to price the downside hit to eurozone growth under such a scenario, while ECB easing expectations would likely need to be downgraded too, even as Fed easing expectations see a revision higher. That leaves risks skewed toward EURUSD giving up recent gains – so whilst outperformance on crosses still looks likely for the euro, the scope for additional upside against the dollar should be limited by relative fundamentals.
GBP
Sterling continues to trade under pressure versus the euro to start the new week, with the latter seeing haven demand that is helping support outperformance. Against the dollar, however, sterling is tracking sideways for now, though we see downside risks building given our dollar base case. And, with the UK government seemingly playing wait and see, there looks to be minimal prospect of this changing short term, with data this week likely to be heavily discounted given the rapidly changing backdrop of global trade.
This content was originally published by our partners at Monex Canada.