CAD
Political drama gripped loonie traders on Monday, with news that Justin Trudeau is set to resign representing the major non-US story to start the week. We would, however, note that he has vowed to stay on until a new leader is selected, a process that is expected to conclude in March. In the intervening period, Trudeau has asked that Parliament be suspended, with sitting only resuming on March 24th. A confidence vote in the government is due to take place once this happens. Crucially, we see little risk that the new Liberal leader can pass such a motion, which should trigger a general election, sending Canadians back to the polls in mid-2025. For the time being, markets are taking comfort from news that Trudeau is headed for the exit, having become increasingly disillusioned with his leadership. This sentiment, combined with events in the US, saw USDCAD slip 0.8% yesterday. But it also means that Canada will lack an effective government for most of the H1, hardly a confidence-inspiring scenario in most cases, but one that should be deeply worrying when faced with the risk of Trump tariffs perhaps as soon as this month. With this in mind, we still think that underlying dynamics should favour loonie weakness, despite yesterday’s price action.
USD
Rumours that Trump would implement only targeted tariffs saw the dollar slide to start the week, only for this story to be squashed by Trump himself on social media yesterday afternoon. Even so, the DXY index is now just north of 108 this morning, having begun the week trading around the 109 level. As we see it, this latest round of tariff headlines plays to market biases, which are broadly inclined to discount the possibility of broad import levies, meaning that yesterday’s greenback weakness should be temporary, rather than the start of a more sustained trend. Indeed, the beginning of that turnaround could come as soon as today, with market focus on JOLTs data and ISM services readings. We are inclined to think that both will paint a relatively rosy picture of the US economy, which should at least help to arrest the recent dollar momentum.
EUR
Outside the US, euro traders will be keeping an eye on inflation data this morning, with an aggregate eurozone print set to land at 10:00 GMT. Consensus expectations look for a 1.6% YoY headline price growth print, alongside a 2.7% core reading. That said, given an upside beat to German data yesterday, we see risks as skewed in favour of a marginally hotter-than-expected set of prints. If realised, this should ensure that the euro stays bid this morning, extending Monday’s EURUSD rally which saw the pair climb by 0.8%.
GBP
Broad dollar dynamics also saw the pound make gains on Monday, with little on the docket domestically to disrupt cable’s upward momentum. Even so, we think BRC like-for-like sales data this morning is worthy of note. The latest set of figures rebounded sharply in December, rising by 3.1% against expectations for a -0.2% reading. This should come as a welcome relief for policymakers after the UK economy appeared to stall in October and November. It also supports our call for UK growth to pick up in early 2025 after what was likely a soft end to last year. With this in mind, sterling continues to look a little cheap, particularly on crosses, albeit given the lack of market reaction this morning, a leg higher for GBPEUR is likely to require a broader improvement in economic indicators.
This content was originally published by our partners at Monex Canada.