CAD
Perhaps unsurprisingly given the risk that tariffs pose to the Canadian economy, USDCAD saw a sharp reaction to tariff headlines on Monday, dropping from above 1.445 to almost 1.425. That slide has almost entirely reversed this morning, however. Suggestions that tariffs are just around the corner have killed off any loonie relief rally. Given our longstanding view on tariffs, we see further upside risks for the pair too, albeit CPI data later this afternoon may offer another temporary reprieve. Market expectations for this afternoon’s release look for a further cooling in price growth readings. We see upside risks given the impact of government stimulus prior to the holiday period, which should help keep any further CAD selloff contained for now, if realised.
USD
The dollar whipsawed through Monday trading – albeit the DXY index ultimately finished down by 1.25% as markets digested a raft of headlines concerning potential Trump tariffs. These started with reporting from the WSJ shortly after midday, suggesting that day-one tariffs were off the cards, only for Trump to use his inauguration speech to indicate that import levies were still very much on the way, as is the establishment of a new “External Revenue Service”. Reporting since has suggested a potential February 1st date for the imposition of tariffs on Canada and Mexico specifically, helping the dollar to unwind some of yesterday’s move higher through early trading. As we see it – markets are trading their biases for now, with many sell-side desks heading into inauguration day skeptical of Trump’s tariff threats. We think this misses the point, however – no tariffs yet, does not mean no tariffs at all, keeping our underlying thesis for the period of maximum tariff concern to come in February, alive and well for now. Accordingly, we still look for further dollar upside in the coming weeks. For the time being, though, currencies will likely continue to trade on tenterhooks, with tariff headlines likely to stay front of mind for FX markets.
EUR
In line with the swings of the greenback, Monday was also a rollercoaster ride for EURUSD. After rising above 1.04 yesterday afternoon the pair has started to give back some gains, and is now trading 0.6% off Monday’s high. Today, a speech by ECB President Lagarde in Davos, along with tariff risks, should be the major drivers for EURUSD. Our views on the latter, combined with what we think is likely to be some dovishness from Lagarde on balance, should see the pair continue to grind back towards 1.03 if our base case plays out.
GBP
After briefly flirting with levels above 1.23, cable has given back some of yesterday’s gains this morning, with sterling broadly tracking the euro, in line with the pound’s typical sensitivities. This is still true even after UK wage data the morning printed moderately hotter than consensus expectations – weekly earnings ex bonuses rose 5.6% 3m/YoY in November, up from 5.2% in October and above the 5.5% expected by markets. With an otherwise quiet day on the cards from a UK perspective, and markets more broadly focused on the US, this should leave cable free continue sliding against the dollar on tariffs risks.
This content was originally published by our partners at Monex Canada.