CAD
Perhaps unsurprisingly, the loonie is at the centre of attention once again to start the week. USDCAD is trading around 1.47, having come close to testing 1.48 in the early hours of the morning. This matches the highs for the pair seen in 2020 and 2016, and in our view is only the start. After all, Canadian politicians have threatened retaliatory tariffs, and it now looks highly likely that this trade war will tip the Canadian economy into recession in the coming months. With this in mind, we continue to call for USDCAD to test 1.50 in the not-too-distant future. How long this takes will likely depend on the restraint shown by policymakers on both sides, and the willingness of the BoC to support the Canadian economy.
USD
After months of speculation, the weekend finally saw Donald Trump follow through on one of his key campaign promises, announcing a 25% tariff on imports from Canada and Mexico, accompanied by a 10% levy on Chinese imports. As we have warned for some time, we thought this outcome was likely, and underpriced by markets. As such, it is not at all surprising to see the dollar start the week much stronger, with the DXY index currently trading at 109.7, having ended last week at 108.5. We think there is likely more to come too. Canada and Mexico have both threatened to respond with retaliatory tariffs, while Trump also has the eurozone in his sights, meaning that this looks like the first volley of what is likely to be a wider trade conflict.
EUR
Despite not being directly targeted in the first round of Trump tariffs, the euro still trades under pressure to start the week. Very early price action saw EURUSD briefly dip below 1.015, before stabilising just above 1.02 in the subsequent hours. Aside from a very brief in mid-January, this leaves the pair trading at lows last seen in November 2022. Moreover, we still think there is more downside to come, with parity very much in play for the pair. Markets will continue to parse the weekend’s events, particularly as Europe comes online this morning, and in light of further threats by Trump specifically targeting the eurozone. With this in mind, we suspect that the week’s other events are likely to take a backseat in traders’ minds. January inflation readings and December’s industrial production data are top of the docket, but both pale into insignificance when compared to the impact of US tariffs.
GBP
In line with our longstanding view on tariff risks, the weekend’s events proved beneficial for sterling versus the euro, with GBPEUR starting this morning trading above 1.20, levels not seen since before markets began to worry about the UK’s fiscal position early last month. Admittedly, that still leaves GBPUSD trading around 1.23 with the pair dipping to start the week in line with broader dollar moves. Nevertheless, we expect the pound to outperform in the short term, given the UK’s relative insulation from tariff risks, ahead of the BoE’s first rate decision of the year, scheduled for Thursday.
This content was originally published by our partners at Monex Canada.