CAD
Despite Trump’s comments, USDCAD was remarkably stable through Tuesday trading. Granted, the pair briefly threatened to break below 1.43, but a rebound through afternoon trading saw just a 0.5% rally, a more muted move than seen across dollar pairs more broadly. To us, that looks odd and leaves the loonie scanning rich. Trump once again singled out Canada as a target for tariffs – a threat we continue to take seriously, and which if realised would warrant a much higher USDCAD rate. With a blank calendar domestically, we suspect that loonie traders will continue to parse Trump’s statements today, a dynamic that should support a continued USDCAD rally given the sizeable risks now looming on the horizon.
USD
The dollar ended Tuesday trading in the green after a relatively quiet morning, helped in large part by a speech from President-elect Trump. Despite initially being billed as an announcement on data centres, Trump also failed to rule out invading both Greenland and Panama, proposed renaming the Gulf of Mexico, and suggested that “windmills are driving the whales crazy”. Perhaps most importantly from a market perspective, however, was further commentary on tariffs. Trump continued to double down on the prospect of “substantial” levels on imports from Canada and Mexico, in contrast to reporting earlier this week which suggested that tariffs might ultimately be more targeted. This not only saw both JOLTS data and ISM readings take a back seat for traders, but did much to help the DXY index post gains of 0.3% on the day, more than reversing a soft morning session. It is also in line with our thesis for the dollar in the coming months, namely that markets continue to underestimate Trump’s seriousness on tariffs, which should warrant a stronger dollar. More immediately, however, we will be keeping a close eye on this afternoon’s releases. While initial jobless claims are unlikely to be a big market mover, FOMC meeting minutes should be more interesting. As noted previously, we think the Fed is now on an extended pause. A hint in this direction later today should add yet more support for dollar upside later today if delivered.
EUR
Both headline and core inflation in the eurozone matched expectations last month, according to flash readings published yesterday. Hotter than anticipated readings from Germany were offset but an unexpected softening for price growth in France, ultimately leaving aggregate figures a net-neutral for markets. That left the greenback in the driving seat where EURUSD price action was concerned, a pattern we expect to continue through today too, with little market-moving data on the docket for Europe, and a speech by Villeroy the only central bank commentary of note.
GBP
While a light data calendar offered little impetus for sterling on Tuesday, long-term UK borrowing costs did manage to capture some market attention. Specifically, 30-year gilt yields reached 5.25% yesterday, the highest since 1998, a dynamic that is likely to cause a headache for the Chancellor given what are already tight fiscal spending plans. Even so, the spillover to FX markets was limited, with GBPEUR still notching gains. As we see it, this is a story to watch rather than a cause for more immediate panic, albeit the reasons for worry around the state of the UK economy continue to build in a fashion that should be concerning for policymakers.
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