CAD
Choppy price action with little direction remains a theme for USDCAD. With no new tariff in the pipeline as yet, the loonie has become an afterthought for markets in light of the disruption playing out elsewhere in markets. That said, we still see risks for the pair skewed to the upside, with equities and oil sliding, and trade risks continuing to loom, we struggle to turn bullish on the loonie despite USDCAD’s recent run lower.
USD
Despite hopes that the Trump administration would grant a last-minute reprieve, the reciprocal tariffs announced last week came into force overnight. The only significant change of note relative to the President’s Liberation Day announcement concerns China, which will now face a 104% tariff rate after announcing its own retaliatory measures. Unsurprisingly this is causing further disruption across markets, with North American equities sliding once again yesterday, even after a positive start to the session, with Asian stock markets broadly following suit this morning. Yet despite the broad risk-off environment, the dollar is failing to pick up support. Treasury yields have risen sharply, while the DXY index finished Tuesday down 0.5% at 103, dropping close to 1% further this morning. To us, this looks like a severe bout of market indigestion, with traders trying to figure out what is going to happen next, with competing narratives around both the likely stickiness of tariffs, and the consequences these will have for the US economy and the Fed. For now, this is being priced as a primarily US shock, leaving cross-asset pricing looking inconsistent in our eyes and seeing liquidity stresses build, warranting a dollar discount. But as these tensions are resolved in the coming days and weeks, we still see a path higher for the dollar, despite what is likely to be significantly elevated levels of volatility as that process plays out.
EUR
In keeping with the dynamics of recent weeks, the euro was the big winner overnight as an alternative safe haven destination. This has seen EURUSD take another leg higher to trade clear above the 1.10 level this morning. That said, we think this will be short-lived. Markets are yet to fully factor in the growth shock that tariffs will impose on Europe, and the impact that higher US inflation will likely have at the Fed. Expected growth and rate differentials should both widen in favour of EURUSD downside as traders continue as the full impact of these tariff levies becomes apparent in the coming months, with realisation that this is a global shock, also helping the dollar to recover its haven status in a reversal to recent trends.
GBP
After showing some signs of a turnaround yesterday, sterling has once again been hammered against the euro, with the cross briefly trading sub-1.16 – depths last plumbed almost 12 months ago. That said, this looks more a function of eurozone exceptionalism than UK underperformance at present, with sterling trading broadly in line with other risk-sensitive G10 currencies, making some headway versus the greenback. And, with a light data calendar in scope and tariff concerns still front of mind, we expect the pound to continue trading in line with broader market moves too, and that suggests a recovery for the pound on dimming euro haven demand.
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