Written by the Market Insights Team
A dumb thing to do
Kevin Ford –FX & Macro Strategist
The Loonie remains on standby as U.S. Commerce Secretary Howard Lutnick signals the possibility of tariff relief for Mexican and Canadian goods under North America’s free trade agreement, potentially as soon as today. This could be the shortest trade war ever or extend the uncertainty while the US administration make up their mind in relation to their trade policies with their closest trade allies. Currently, the Loonie has been fluctuating between 1.439 to 1.454. While dollar softness has provided some relief to the USD/CAD, it remains on uncertain footing. FX Markets are closely watching for a possible policy pivot from President Trump, maintaining a cautious outlook.
While we wait on some news, it’s worth bringing back these two questions: what will be the economic impact, if they stay for long, and are these tariffs truly tied to fentanyl and immigration?
First, the Canadian Chamber of Commerce published a report modeling the potential economic fallout. Broadly speaking, tariffs not only reduce real incomes but also distort prices and intensify inflationary pressures. Most critically, the longer they persist, the greater the harm for both nations. From a macro standpoint, tariffs make minimal practical sense. As the Wall Street Journal fittingly described, this may well be the “dumbest trade war in history.” Consider the auto industry, for example—it’s so deeply integrated across the region that some vehicles cross borders up to eight times during assembly. The CUSMA/USMCA agreement, negotiated about five years ago, was designed to strengthen economic ties and was once praised as a “historic win” by Trump. Now it’s being deemed insufficient.
Second, are these tariffs really about fentanyl and immigration? The short answer is no. Data from U.S. Customs and Border Protection clearly shows that Canada contributes a negligible share to America’s fentanyl imports. Furthermore, immigration challenges are predominantly centered on the southwest border, as the statistics reveal.
So, what’s next? Canada and Mexico plan to challenge the tariffs under USMCA rules but resolving the dispute could take time. During Trump’s first term, he imposed tariffs on steel and aluminum and threatened the auto sector to force a NAFTA renegotiation. In response, Canada retaliated with higher tariffs on U.S. steel, aluminum, and various other goods. It took nearly two years from Trump’s election to finalize the USMCA. Similarly, in 2018, tariffs on Canadian solar products weren’t lifted until two years later, when they were found to violate USMCA terms.
Prime Minister Trudeau has vowed to get the tariffs lifted as quickly as possible. He also emphasized that picking fights with friends and allies is, in his words, a very dumb thing to do. If the tariffs persist beyond a few weeks, Canada and Mexico may push for an early renegotiation of CUSMA/USMCA. The first scheduled USMCA review between the U.S., Mexico, and Canada is set for summer 2026. Let’s see what happens in the next few hours.
EUR: soars to 16-week high
George Vessey – Lead FX & Macro Strategist
The euro is up a whopping 2.5% versus the US dollar this week, erasing last week’s losses and more and hitting its highest level ($1.0640) since November. The playbook until now has been that rising tariff tensions were bad for the common currency as the EU would be targeted next by Trump. However, with investors more focussed on the negative implications for the US economy in an already softer US economic backdrop, the dollar has been the biggest loser of these tariff measures so far.
There is a realisation that the US dollar must adjust to a new reality of higher domestic prices and weaker growth, owing to Trump’s tariff measures. It’s losing its safe haven appeal it seems. Moreover, the dovish recalibrations of Fed policy has pushed the Eurozone-US real rate differential to its highest since September, having hit a 1-year low back in December just two weeks before EUR/USD fell to its lowest level in two years. The euro might have the legs to rise even higher over next couple of weeks to bring it close to fair-value territory implied by real rate differentials. Plus, the news coming out of Brussels that the EU is looking to boost defence spending could raise economic growth prospects and reduce expectations of rate cuts by the ECB (European Central Bank).
The ECB meets on Thursday, with a 25-basis point cut baked into market pricing. But the governing council may introduce new language to suggest that further reductions to the policy rate beyond March are no longer a given. This might spur a re-pricing of the rate cuts that the markets have factored in and provide an even stronger tailwind for the euro.
The trade war has begun
Boris Kovacevic – Global Macro Strategist
The tit-for-tat trade war is officially underway. The US administration enacted new tariffs yesterday, raising duties on most Canadian and Mexican imports to 25% while doubling the existing 10% levy on Chinese goods to 20%. Retaliation was swift—Canada announced a phased tariff plan targeting approximately $100 billion worth of US goods, Mexico is expected to follow suit by the end of the week, and China imposed tariffs of up to 15% on select US products.
Until now, investors had grown complacent about tariff risks, reassured by Trump’s repeated delays and adjustments to the rollout. However, the latest round of levies signals a clear deterioration in trade relations, significantly increasing US recession risks. Investors on Polymarket have adjusted their outlook, accordingly, pushing the probability of the US economy contracting for two consecutive quarters this year from 23% last week to 37% today. This shift in sentiment is also evident in fixed-income markets, where expectations for Federal Reserve rate cuts have surged—markets now fully price in three rate cuts for the year.
Fears of a prolonged trade conflict and economic downturn have sent bond yields, the US dollar, and global equities tumbling. European markets, wary that the continent could be the next target for US tariffs, saw the STOXX 600 suffer its steepest daily loss (-2.1%) since August. While US equities pared some of their declines, they remain vulnerable. Treasury Secretary Bessent has reiterated the administration’s commitment to prioritizing Main Street over Wall Street, reinforcing concerns that the so-called “Trump put” may be far lower than initially expected. However, the confusion over the length and goal of Trump’s tariffs remains. Less than twelve hours after imposing these tariffs, did US Commerce Secretary Lutnik state that some of the levies might be taken back. Following the news flow and macro data remains critical.
GBP: Breaking through resistance barriers
George Vessey – Lead FX & Macro Strategist
The British pound is also surging higher against the US dollar amidst a slowdown in US economic data, eliminating the US ‘exceptionalism’ narrative and driving a convergence in US performance with elsewhere. GBP/USD has broken above its 200-day and 200-week moving averages and is flirting with $1.28 this morning, bang on its 5-year average and almost 6% higher than its January low of $1.21.
With key resistance barriers to the upside broken, sentiment in GBP/USD has shifted from short-term bearish to bullish. We half expected GBP/USD to trend lower over the next month before staging such a rebound, but it seems Trump trades are starting to unravel quicker, and the dollar’s tariff risk premium is fading fast as the focus shifts from the inflation implications of policy and onto the growth risks for the US economy. There are also indications that interest rates in the UK will stay higher for longer. While Bank of England Governor Andrew Bailey said recently that four rates in 2025 may be the most likely path for the evolution of the policy rate, still-sticky consumer prices and private sector wage growth may pose a hurdle.
As a result, sterling looks like an appealing currency in the G10 space, surging higher against low yielding safe havens as well as high-beta trade-sensitive currencies. GBP/JPY, for example, is up 1.2% this week, eying ¥192.0. GBP/CAD is up 1.4%, has risen every single day since February 11 and clocked a near 9-year high yesterday. However, with the surge in demand for the euro, GBP/EUR has slipped back from €1.21 to trade closer to the €1.20 handle this morning.
Euro shines across the FX space
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 03-07
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