CAD
While Q4 GDP to end the week remains the main data release of note in Canada, Trump’s comments overnight shift the focus for loonie traders squarely onto trade risks. This has already propelled USDCAD above 1.42, with the pair rising 0.25pp overnight. We think there is plenty more where that came from, however, with current levels still 3.5% below the early February high, recorded when tariff fears were most acute. For the time being, we think markets will be cautious about taking USDCAD aggressively higher, not least given the previous tariff suspension. But the longer traders wait without hearing news of a further suspension from the White House, the higher we expect USDCAD to climb. Our house view remains that tariffs will be implemented at some point in the coming months, driving USDCAD to 1.50. The timing of this move, however, remains an open question, and is largely dependent on if tariffs are implemented next week as to whether this comes sooner rather than later.
USD
Donald Trump remains in the driving seat for FX markets, having been briefly dethroned to start the week by German election results. Indeed, when it comes to the US President, we think there are two stories of note from yesterday. First, Trump’s meeting with French President Macron went better than many, including ourselves, had predicted – an outcome that could help alleviate some of the downside risks around Russia-Ukraine peace negotiations. The second was an indication that 25% tariffs on imports from Canada and Mexico would go into force on March 4th, when the current suspension expires. Given all the noise surrounding the new administration, and traders’ inclination to take tariff threats with a large pinch of salt at this juncture, the impact on FX markets from these latter developments has been limited so far. But we suspect that the mood music will grow heading towards the end of the week, and that should support dollar upside.
EUR
After an initial knee-jerk higher for the euro, the single currency finished trading broadly unchanged on Monday. Underpinning this, German election results had left traders with plenty to ponder. On the one hand, a CDU + SPD coalition looks likely, the preferred market outcome ahead of the vote. But set against this, the AfD, together with Linke have secured enough seats to form a blocking coalition in the Bundestag, one that is likely to stymy any reforms to the constitutional debt break. With this in mind, markets are now starting to wake up to the difficulties that CDU leader Merz will face, both in forming a coalition, and in governing Germany once he does. This warranted initial optimism being priced out of the euro yesterday and poses a further downside risk to the single currency moving forward. More immediately, however, traders will be focused on eurozone negotiated wage data today. Published at 10:00 GMT, we do not expect this to be a game-changer for the ECB. Higher frequency indicators have already pointed to a slowdown in wage growth through Q4, so a drop from 5.4% YoY seen in Q3 is unlikely to come as a surprise, nor is it likely to do much to shift the current debate on the Governing Council, or the euro as a consequence.
GBP
BoE Chief Economist Huw Pill should be the main UK event for today. Not that we expect him to say much of note for markets. The current market expected rate path for Bank Rate, projects 2-3 more cuts this year. That seems fair to us, and in line with previous comments from Pill, meaning that rate expectations should remain undisturbed by his speech at 14:00 GMT. That leaves sterling price action to be dictated by broader crosswinds once again, a dynamic that we suspect favours GBP upside on crosses, reversing a modest slide seen yesterday.
This content was originally published by our partners at Monex Canada.