CAD
Despite the muted reaction seen elsewhere in FX markets, USDCAD spent Monday trading notably weaker, albeit still below the 1.44 level where it spent much of last month. That said, we think it is likely only a matter of time before the pair reclaims these highs, helped by sticky inflation in the US, accompanied by rising tariff risk premia. On the domestic front too, a note of caution is warranted. As we warned at the end of last year, temporary fiscal stimulus measures were likely to result in an economic sugar rush, and as such, traders should be wary of inferring too much from a rebound in data prints in the short term. With this in mind, we are inclined to discount Friday’s strong payrolls data, for now at least. If we are right, the February readings are likely to see much of the holiday strength fall away – another factor in the column favouring a higher USDCAD rate.
USD
The DXY index starts Tuesday trading just north of 1.08, largely unchanged from Monday and only marginally higher than levels seen Friday afternoon, despite Trump’s imposition of a 25% tariff on steel and aluminium imports. Granted, as a share of total goods flowing into the US, the effect of these latest levels should be small. But as a signal, we think this latest decision is notable. It runs counter to the market bias that sees tariffs as a negotiation tactic. As we laid out in our February forecasts, we also expected Trump to implement more targeted levies to protect domestic industry. Tariffs on steel and aluminium fall squarely in this second category, albeit coming earlier than we had expected – our base case looked for the next round of tariff rises to come at the end of Q1. Nevertheless, we suspect these levies are unlikely to be lifted any time soon, given the underlying motivation. Indeed, we fully expect similar additional measures to follow, targeting other strategically important imports in the coming months. For now, markets are yet to fully account for this change, and that leaves dollar risks skewed to the upside over the medium term. Whether or not a stronger dollar materialises short term, however, will likely depend on tomorrow’s CPI report, albeit given our view that price growth will prove sticky once again, greenback upside should be the outcome.
EUR
EURUSD continues to hover around 1.03, somewhat to our surprise given Trump’s tariff announcement. Granted, he has only targeted steel and aluminium for now, but we suspect that cars are likely next, and that poses significant downside risk to the eurozone. That leaves the single currency at the mercy of headlines emanating from the White House this week, albeit, with risks favouring a further euro softening if our view on tariffs proves accurate.
GBP
The pound has begun Tuesday trading on the back foot, despite BRC like-for-like sales rising 2.5% in January, much faster than the 1.0% expected by markets. This weakness appears to be prompted by an FT story this morning, featuring an interview with the BoE’s Catherine Mann. In it she attributes her decision to vote for a 50bp rate cut last week to “weaker demand conditions”, signalling a change in her view on the underlying state of the UK economy. Mann is due to speak again at 08:45 GMT in what is likely to be a closely watched event. But if her comments continue to skew dovish, this will represent a fundamental shift in the balance of views on the MPC – one that is likely to warrant further sterling weakness.
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