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CAD
Given the overnight comments from Trump, USDCAD is naturally one of the major movers this morning. The pair is currently trading up around 1%, with loonie weakness proving stickier than the softening seen across other major currencies. This is, however, very much in line with our post-election base case. It has been a little lonely for us in recent weeks, suggesting that markets were overlooking the downside loonie risks stemming from potential Trump tariffs. Even so, despite the overnight moves, we are inclined to think there is more upside in store for the pair. Markets have only just begun to price in the potential negative impact on the Canadian economy from trade risks, and we continue to see USDCAD at 1.50 as a reasonable target over the next year if the proposed tariffs are implemented. More immediately, however, the pair’s fortunes will likely depend on central bank commentary. BoC Deputy Governor Mendes is speaking at 13:20 GMT, with Fed meeting minutes due this evening too – we have low conviction on the steer that both will offer to FX markets, but see risks tilted marginally in favour of further USDCAD upside on balance.
USD
After a relatively quiet Monday for FX markets, President-elect Trump has put tariff risks front of mind once again, sparking large overnight moves. Specifically, Trump singled out China, Mexico, and Canada, as potential targets for day-one tariffs, with the news having spillovers to other FX pairs too, seeing the DXY index gap up almost half a percent before paring some gains over recent hours. Trade risks should remain a focus for the remainder of the day, with FOMC meeting minutes at 19:00 GMT the major release of note for FX markets. Indeed, we will be interested to see what consideration Fed members gave to the election outcome in their deliberations, given that the November policy decision came just a day after Trump’s election victory.
EUR
While the euro saw some modest moves on the back of Trump’s overnight comments, these have mostly proven temporary, with the pair now trading only marginally lower than levels seen yesterday evening. Indeed, we think that ECB-Fed divergence and eurozone political risks remain the two major drivers for the pair longer-term. The first of these should be a focus this week too, with November CPI data set to be published and the odds of a 50bp cut next month currently standing at 30% according to swap markets. Ahead of the data though, we have no fewer than five ECB speakers due today. Whether or not they close the door on the prospect of a jumbo rate cut should be the major focus for markets, with any endorsement likely to see renewed EURUSD downside.
GBP
After trading on the back foot through Monday, sterling continues to weaken at the margin this morning too. That said, we think the pound now looks cheap at current valuations when considering that the UK should be relatively insulated from tariff risks, leaving scope for a retracement higher, particularly on crosses. Whether or not this plays out today, however, will depend on CBI retail sales data, set to be published at 11:00 GMT. Market expectations project a notable slide from October’s print, leaving a low bar for the data to exceed. We are inclined to think it will, tilting risks towards sterling upside later this morning.