CAD
Given that Canada was the explicit target of yesterday’s US tariff threats, it is no surprise to see USDCAD notching higher, with the pair now trading above 1.44 on the back of these latest developments. We think it should climb higher still, absent and further flip-flopping by Trump. After all, USDCAD hit 1.48 in early Feb on the back of tariff risks. For today, however, we suspect that domestic data could offer some respite for the loonie. Q4 GDP readings published this afternoon are likely to show a strong end to last year. We have warned previously that this is a red-herring, with the strong growth stemming from temporary stimulus. Nevertheless, we suspect that some in markets will be willing to take the data at face value, and that should take the edge off any tariff-induced depreciation pressures.
USD
A risk-off tone is the dominant theme across markets this morning, coming on the back of events yesterday which saw President Trump walking back comments from earlier in the week, which had appeared to suggest that tariffs on Mexico and Canada would go into effect on April 2nd. This is, in fact, the date at which the US will impose reciprocal tariffs on all US imports. The President clarified that tariffs on Mexico and Canada are due to rise to 25% on March 4th, and that this would also be accompanied by a further 10% rise in the levy applied to imports from China. All told, this saw a notable pullback in equities, while the dollar rallied sharply. The DXY index is now trading 0.75pp higher than it started Thursday morning. With the tariff implementation date fast approaching, we suspect this is set to continue. By our reckoning, there is still significant scope for markets to price in additional tariff risk, and that combined with a haven bid on growth fears and given only January PCE readings to contend with today, should keep the dollar supported into the back end of the week.
EUR
With the dollar on the front foot, EURUSD naturally slipped on Thursday afternoon. The pair is now hovering around 1.04 – having traded north of 1.05 less than 48 hours prior. We think more downside is to come, with Trump having singled out the EU for criticism in recent days, and the President suggesting that a 25% tariff is in the works. We continue to see early April as the most likely time for any such levy, consistent with Trump’s comments yesterday, and it will be shortly after federal government departments are due to deliver reports on tariffs and trade. For today, though, inflation data is in focus. While yesterday’s Spanish readings came in marginally hotter than expected, this morning, French CPI readings for February did the opposite, remaining unchanged MoM, 0.2pp below consensus. While further data from Germany later today will offer a better idea of where the final eurozone CPI will land, given the data seen so far, we are inclined to think that these latest prints should be net neutral for the euro all told.
GBP
While the pound traded under pressure against the dollar on Thursday, GBPEUR notched year-to-date highs. In large part, this reflected markets increasing willingness to price in differential tariff impacts on the UK versus the eurozone. But we can’t help but think that Kier Starmer’s meeting with Trump helped at the margin. In fact, the meeting between the two leaders went much better than we had anticipated. Granted, Vice President JD Vance still attempted to take the PM to task over free speech in the UK, but otherwise, the meeting was cordial with few obvious signs of discord. Indeed, Trump even suggested that the UK could escape tariffs entirely if the UK were to agree on a trade deal with the US. While not our base case for now, this would be a game-changer for sterling. Even so, we remain sterling bulls in any case, looking for GBPEUR to rise above its post-Brexit ceiling in the coming months as tariff risks continue to crystallise.
This content was originally published by our partners at Monex Canada.