CAD
The Canadian dollar had a solid trading session on Thursday, rising 1% against the greenback. Even so, this is less impressive than other G10 counterparts – a little surprising given that Canada was exempted from any Liberation Day levies. To us, this reflects the continued risk that looms over the Canadian economy, with traders waiting for the other shoe to drop. As such, we would not be surprised if the loonie continued to underperform, despite yesterday’s gains versus the dollar.
USD
Liberation day fallout remains the main story in town for markets, with explosive moves seen through yesterday’s trading session, prompted by the widespread surprise at Trump’s tariff proposals. The dollar fell almost 2%, in contrast to the expectations of many, including ourselves, who had expected to see the greenback rally, in keeping with prior announcements. This was arguably overshadowed by the performance of equities, with the S&P 500 declining 4.84%. In short, investors were less than impressed by these tariff proposals, which potentially represent the biggest upset to global trade since the end of Bretton-Woods. They reacted by pricing in a significant downside shock to US growth. While we are inclined to agree that these latest tariffs should see a negative impact on US activity, as we warned ahead of the event that it would likely take days if not weeks for markets to fully digest the news, not to mention any retaliation and spillover effects.
To this point, we continue to think that markets have underestimated the impact on global growth, while the four Fed rate cuts now priced for this year look far too aggressive, especially when considering that import levies should see US inflation rise in the coming quarters. So, while recent events are being traded as a largely US specific shock for the time being, we remain of the view that as the broader impacts become apparent, this should favour the dollar. With such a big market story playing out in real time, it also means that some typically market-moving events are garnering less attention than they otherwise would. This is likely to remain the case later today, with the March US jobs report due. Markets look for a 110k NFP print, while we see risks skewed toward a beat, but barring a significant negative surprise that plays into market recession fears, we suspect the readings will largely be discounted as dated, given the events of recent days.
EUR
With the greenback in full retreat on Thursday, EURUSD was arguably the day’s biggest winner, rallying more than 2% by the end of trading after briefly threatening to test 1.1150. This was somewhat surprising given that Wednesday night’s announcement saw the bloc slapped with a 20% US tariff, while the eurozone economy is typically seen as sensitive to global trade. Indeed, the combination of this fact with expectations that the EU would be singled out by Trump has made short EURUSD a favoured expression for tariff risks in recent months. The difference yesterday seems to have come from the shock triggered by Trump’s latest tariff announcement, a dynamic that has seen the euro begin to pick up a haven bid as investors rotated out of US assets. We doubt this will last, however, in keeping with our broad macro thesis. That leaves risks for EURUSD skewed to the downside over the coming days and weeks.
GBP
Sterling notably underperformed on Thursday, despite only being targeted with a 10% tariff rate. This compared favourably to the EU’s 20% levy, and yet, GBPEUR still sank by roughly 1%. Now in part, we suspect that euro haven demand likely fueled some of this move. But we suspect that the UK’s ugly fiscal math likely played a role too. A growth shock caused by US tariffs likely eliminates most if not all of the Chancellor’s headroom following the Spring Statement, a reality that would be expected to weigh on the pound. But yesterday’s price action also contained some relief for the Chancellor too, with falling Gilt yields offering a reprieve. How this nets out will be key for sterling fortunes in the coming weeks, but we see risks of a retracement higher versus the euro, even as the dollar makes gains more widely.
This content was originally published by our partners at Monex Canada.