Written by the Market Insights Team
Preemptive moves by Canadians on trade risks
Kevin Ford –FX & Macro Strategist
Wednesday brought its fair share of key updates. The White House rolled out 25% tariffs on steel and aluminum, effective immediately, with zero exemptions. The European Union hit back with tariffs on a range of goods—steel, aluminum, textiles, home appliances, agricultural products, and even iconic American staples like motorcycles, bourbon, peanut butter, and jeans, echoing the trade spats of Trump 45’. On the data front, U.S. CPI cooled slightly to 2.8% YoY. The Bank of Canada (BoC) responded to economic uncertainties with a rate cut to 2.75% as widely expected. And right after the decision, Canada’s Finance Minister announced retaliatory tariffs on U.S. steel, aluminum, and items like computers, sports equipment, and cast-iron products. The Loonie reacted on the hectic day with a 120-pip intraday swing, with a high of 1.448 and a subsequent move down to 1.436 during North American trading hours.
Three key takeaways from the day’s events:
- BoC’s Policy Stance: the BoC reiterated that monetary policy alone cannot shield the economy from the fallout of a trade war. However, it remains committed to preventing trade-induced inflation from becoming entrenched. Governor Macklem emphasized a forward-looking approach to navigate the uncertainty around inflation: weaker economic growth may alleviate inflation, but trade uncertainties, a depreciating Loonie, and counter-tariffs could drive it higher. The central bank faces a challenging task ahead, with target rate likely to remain steady at its next meeting on April 16th.
- Consumer and Business Sentiments: findings from the BoC’s latest survey reveal that mere threats of trade disruptions have prompted Canadian businesses and households to respond preemptively. Many are saving more, cutting discretionary spending, delaying long-term investments. Also, half of businesses surveyed plan to increase their prices if tariffs are imposed on their inputs or products and inflation expectations among both consumers and businesses are coming up higher.
- U.S. Treasuries’ Response: following the U.S. CPI report, yields on 10-year Treasuries rose, but why? This reaction stems from skepticism about whether the weakness in airfares, which brought CPI lower, will influence the Fed’s preferred PCE index. Furthermore, recent upticks in core goods inflation, a key driver of disinflation in 2023, signal that tariffs could intensify price pressures here first.
Today markets will be focused on US PPI, expected to drop from 3.5% to 3.3% YoY as well as the discussion within the Senate to approve a government funding bill to avoid a shutdown. In Canada, January’s reading on Building permits will be of relevance.
Inflation data overshadowed by tariff threat
George Vessey – Lead FX & Macro Strategist
There was a brief reprieve in risk sentiment yesterday following some good news on US inflation. But the rally in stocks and bonds fizzled out as the details of the consumer price inflation prints were less rosy, whilst global trade war fears escalated. The US dollar index snapped a 7-day decline but remains close to pre-election levels. Meanwhile, US producer price inflation data today might muddy the disinflation narrative, which could make life harder for the Federal Reserve (Fed).
Canada and the EU are responding to the blanket US tariffs on steel and aluminium in a sign that the global trade war is ratcheting up. The 3.7% decline in the dollar so far this month, coupled with the falls in US stocks and their under-performance relative to other countries, reflect a remarkable turnaround in investors’ views about the economic outlook for America and Europe. However, a surprisingly cool set of February US consumer price inflation prints m/m pulled the annual rate of headline inflation down to 2.8% from 3% while core inflation dips to 3.1% from 3.3%. This halted the stock selloff that had put the S&P 500 on the verge of a correction. The details are less rosy though with a substantial 4% m/m drop in air fares (highly volatile) the main factor driving the softer inflation readings. Moreover, there’s brewing anecdotal evidence of firms pre-emptively raising prices ahead of potential tariffs with this week’s NFIB survey reporting a 10 point jump in the proportion of companies raising prices. The risk here is that core inflation starts to reverse and move higher again in coming months.
Tariff fears are already seeing companies nudging prices higher and risk higher inflation readings over the summer, which would further complicate the Fed’s policy decision making amidst growing recession fears. In addition, key components from the producer price index, published today, that enter into the Fed’s preferred inflation measure, are expected to have accelerated from January. This will make it harder for the Fed to cut despite slowing US economic activity. Thus, the outlook for equities and broader risk appetite remains grim.
Will Trump stop the euro rally?
Boris Kovacevic – Global Macro Strategist
The euro’s rally lost some momentum yesterday, slipping below the $1.09 mark. While broader risk sentiment improved after softer US inflation data, European markets faced renewed trade tensions and political uncertainty. President Trump made it clear that he intends to retaliate against the EU’s countermeasures on his 25% steel and aluminum tariffs. This tit-for-tat will raise the already elevated tensions between both regions and could limit the upside on the euro for now.
Meanwhile, German bond markets continue to send a strong signal. The 10-year Bund yield surged past 2.9%, reaching its highest level in nearly 13 years as negotiations over expanded government borrowing intensified. The Greens remain hesitant to fully back the fiscal expansion proposed by the CDU/CSU-led coalition, but alternative proposals suggest a compromise could be within reach. If secured, this could pave the way for a significant boost to Germany’s defense and infrastructure spending—an economic shift that has already started to reshape investor sentiment toward the Eurozone.
For now, EUR/USD remains supported by the broader shift in sentiment away from the dollar, but trade risks are becoming harder to ignore. If Trump retaliates further, it could weigh on European equities and the euro in the short term. However, if a German fiscal deal comes through, it may provide another boost for European assets, especially as US growth concerns mount. Investors will closely watch any new developments on both fronts in the coming days.
Within a whisker of $1.30
George Vessey – Lead FX & Macro Strategist
Sterling climbed to a fresh 3-month peak of $1.2988 on Wednesday, within a whisker of the key $1.30 level, which it has been below for 60% of the time over the past five years. GBP/USD is up 3% month-to-date, and almost two cents above its 5-year average of $1.28, but is still trading within the overbought zone indicated by the 14-day relative strength index. GBP/EUR also snapped a run of six consecutive daily losses as focus turned to EU-US trade war risks following the EU’s retaliation to US tariffs.
While downside risks for the euro and Eurozone economy have diminished due to hopes of huge fiscal reforms, the tariff theme remains a significant near-term risk for the common currency, which appears to be limiting the euro’s gains against the pound. We’re still keeping a close eye on the 50-week moving average, currently located at €1.1888. If GBP/EUR closes the week below this level, we think a slide towards €1.1740 is feasible over the coming month. Otherwise, the pair might stay bound to a tight range given real rate differentials suggests €1.19 is fair value. We think there may be more scope of the pound to stay resilient against the dollar though as currency traders parse where relative interest rates are likely headed over the next six months. Both the Fed and Bank of England (BoE) meet next week, and whilst there’s little chance that either central bank will cut, markets are pricing in around three cuts by the Fed later this year versus an expectation of just two by the BoE.
Indeed, with UK inflation having bounced back and inflation breakeven rates suggesting that increases in retail prices over the next two years are likely to hover close to 4%, the BoE may well decide to defer its next rate reduction. This has already sent nominal yields in the UK relative to those in the US surging in recent weeks, underpinning GBP/USD. As mentioned above though, the pound is in overbought territory so is vulnerable to traders taking some money off the table in the very short term.
US equities swing 5% in seven days
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 10-14
All times are in ET
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
