CAD
The war of words between the Trump administration and Canadian officials intensified yesterday, with further tariff threats issued by both sides. Most notably, this saw Trump threaten to double tariffs on Canadian steel and aluminium, before rowing back after a surcharge on Canadian energy exports was suspended. Even so, it is notable that USDCAD failed to gain ground against the dollar, unlike other G10 currencies. This is, however, consistent with our longstanding baseline – after all, it is hard to turn constructive on the loonie when tariff threats continue to loom large over the Canadian economy. This is a message we expect to be on show from the BoC later today too. While a case could have been made for pausing rate cuts at this meeting, the uncertain economic backdrop has seen markets close to fully price a rate cut ahead of this afternoon’s announcement, scheduled for 13:45 GMT. If delivered, we expect this to be accompanied by minimal forward guidance given the uncertain outlook, a scenario that combined with US CPI earlier in the day, should favour further USDCAD upside.
USD
After falling through Tuesday, the dollar starts this morning in the green, with traders weighing yet another tariff flip-flop from Trump ahead of this afternoon’s CPI report. Indeed, arguably yesterday’s biggest headline came when the President threatened to double a proposed 25% steel and aluminium tariff on Canada in response to a surcharge on some US electricity imports. Both sides ultimately backed down, however, offering a brief relief against an increasingly fraught trade backdrop. But, as with prior rounds of tariff threats, we think markets are missing the bigger picture. A 25% US tariff on steel and aluminium imports still went into effect this morning, even after yesterday’s rapprochement. The direction of travel remains toward higher tariffs, and that should favour the greenback on balance, making the current subdued dollar valuations look cheap from where we stand.
Admittedly, the current dollar weakness is in part a result of concerns around US domestic growth, with this in turn having seen Fed rate cut expectations accelerate in recent weeks. Swaps now price more than three full rate cuts this year, up from just one in mid-February. But this narrative should also be challenged today too, with February’s CPI report the main event of the day. Markets expect to see core CPI growth of 0.3% MoM and 3.2% YoY, in both cases 0.1pp down on January’s readings, but still too hot for the FOMC to have confidence that price growth will stabilise at 2%. That said, two other factors will also be closely parsed, beyond just headline readings. First, traders will be looking for any signs of firms hiking prices in advance of tariffs being implemented – a notable upside risk to inflation. Second, any signs of a pullback in household spending, evidenced by weakness in consumer discretionary components, would also be significant. If seen, this would add support for the argument that the current economic uncertainty is becoming a material drag on growth. If not, then this should be added to the growing hard pile of hard data that suggests markets have overreacted, and that US recession risks are not an immediate concern, warranting a stronger greenback.
EUR
The euro continued to grind higher on Tuesday, prompted by headlines suggesting that the German Greens were open to negotiation on increased fiscal spending. Indeed, the party co-leader went as far as to say a deal could potentially be reached this week, a remarkable rate of progress when considering the usual pace of such negotiations. This was sufficient to see EURUSD sustainably break 1.09 yesterday, albeit that level is proving a downside resistance this morning ahead of Lagarde speaking at 8:45 GMT, with the ECB President headlining a busy docket of ECB speakers, and this afternoon’s US CPI report.
GBP
GBPEUR continued to drift lower yesterday, reflecting a market willingness to embed improved eurozone growth prospects on the back of recent fiscal announcements. In the short term, we see little to undermine this dynamic either, especially given the fast approach of the UK’s own fiscal event on March 26th, where messaging is likely to be much less optimistic. That said, while our tactical sterling bias remains bearish, we continue to see longer-term fundamentals as favourable for the pound. Eurozone efforts are likely to underwhelm, while constrained fiscal space is forcing painful but badly needed reforms in the UK, offering the prospect of a reversal higher later this year.
This content was originally published by our partners at Monex Canada.