CAD
With US tariffs going into force, Canada has responded with levies of their own. For now, this means a 25% tax on C$30bn-worth of US imports, with Canadian tariffs to be placed on an additional C$125bn ($86.2bn) of imports, provided US levies are still in place in 21 days’ time. Perhaps surprisingly when considering the market reaction from early February, these events have not seen a marked selloff for the loonie. While USDCAD spiked higher overnight, it has since given back much of those gains, continuing to trade between 1.44-1.45 as of writing. We doubt this is likely to last. Whatever the downside implications for the US economy from Trump policy changes, we suspect that Canada is likely to come off worse in any trade conflict. This warrants a further move higher for USDCAD as markets digest the news, albeit, given recent price action, we are not holding our breath that this shift will be immediate.
USD
After falling to start the week, confirmation that there would be no last-minute reprieve on tariffs helped stabilise the greenback toward the back end of yesterday’s trading. Even so, the DXY index remains some way off year-to-date highs. As we have noted previously, there are now two factors weighing on opposite sides of dollar price action. On the one hand, we are still inclined to see tariffs as greenback positive. But on the other, growth concerns stemming from both tariffs, and the administration’s broader policies, are doing much to blunt any dollar rally. This second dynamic saw further reinforcement yesterday too, with a grim set of manufacturing PMIs highlighting the risks posed to growth by the ongoing policy uncertainty. Our base case, however, remains that US growth fears are likely somewhat overstated, that markets are underestimating the impact of tariffs elsewhere, and that all told, US import levies should remain dollar-positive on net. But for now, we are respecting the price action, with traders likely needing some time to digest the full implications of this latest development. That means it will likely be tough sledding for those looking for a stronger dollar, at least in the short term.
EUR
Arguably helping take some of the sting out of yesterday’s tariff news, eurozone inflation data surprised to the upside, helped by stronger-than-expected price growth readings in the Netherlands. Granted, some ECB doves will point to the slowdown in services inflation, which has proven notably sticky. But the February readings nevertheless offer a challenge to those looking for significant further ECB easing after this week. While this should keep the euro supported for now, especially if Lagarde points in such a direction on Thursday, we still think the downside impact of tariffs on growth will see the ECB ease further than is currently priced. This, however, is likely to be an April story at the earliest, meaning that the euro should continue to perform reasonably well in the coming weeks against the dollar.
GBP
With the euro holding ground against the dollar on Monday, sterling too made some notable gains. This was despite limited domestic data flow for sterling traders to sink their teeth into. Instead, the focus is likely to be on tomorrow’s Treasury Select Committee hearing, where Governor Bailey will have the opportunity to make his views on tariff risks known. For the time being, however, the pound should continue to trade at the mercy of market cross current, and as such, remain in lockstep with the euro.
This content was originally published by our partners at Monex Canada.