Written by the Market Insights Team
Are tariffs priced in?
Kevin Ford – FX & Macro Strategist
Considering that tariffs currently in place include 25% on steel and aluminum, 25% on non-CUSMA/USMCA-compliant goods, 10% on Canadian energy, 20% on Chinese imports—and a 25% tariff on autos expected to take effect tomorrow—much of the tariff story appears to be priced into the foreign exchange (FX) markets. Interestingly, the muted reaction in FX over recent weeks might suggest that markets do not anticipate these tariffs to persist long-term. The Canadian dollar, often regarded as a gauge of U.S. trade policy uncertainty, has traded within a narrow range and remains virtually unchanged year-to-date. Could it be that FX markets are mispricing today’s event?
One perspective is that the limited market reaction may stem from optimism that reciprocal tariffs could be eased relatively fast through diplomatic efforts, with the expectation that these tariffs will be reciprocally reduced once agreements are reached. However, President Trump’s insistence on the permanence of auto tariffs poses a direct threat to Ontario’s manufacturing sector—one of the pillars of the Canadian economy. The greatest risk for the Loonie lies in a prolonged trade war, making it challenging to determine whether tariffs are fully priced into current valuations. Should tariffs persist at or above 25% across the board, the USD/CAD could weaken, testing levels around 1.45 against the U.S. dollar. Conversely, a lower tariff rate, or tariffs contained to specific sectors, might see the CAD strengthen to test the 1.42 level.
On April 2nd, markets will focus on the size of the tariffs and their geographical and sectoral distribution. Post April 2nd, attention will shift to how countries respond—whether through retaliation, diplomatic efforts, or other measures. Markets will also observe how willing the U.S. administration is to use reciprocal tariffs as leverage to secure long-term trade agreements or economic interests that align with U.S. priorities. For Canada, the timing is problematic, as President Trump has indicated he won’t engage in negotiations until Canadians have elected their new Prime Minister on April 28th. This uncertainty casts a shadow over the Loonie’s outlook, with this week’s macro reports overshadowed by developments in U.S. trade policy.
So far, markets have responded to the uncertainty with caution, with equities being the most sensitive to the news. The VIX, a key volatility indicator, has surged 24% year-to-date, reflecting heightened investor anxiety. Gold has climbed 18% year-to-date, maintaining its status as a safe-haven asset. The fly-to-quality has also had an effect on the Nasdaq and Bitcoin, which have declined around 10% year-to-date.
Historically, April has been the weakest month for the US dollar, with an average negative return of -0.5% over the past 20 years. However, the short-term bullish perception of tariffs may overshadow this seasonal pattern, as the escalating trade wars could significantly influence the dollar’s trajectory on “Liberation Day”, and set the tone for Q2.
Does an awful April await the dollar?
George Vessey – Lead FX & Macro Strategist
Over the last 20 years, April has been the US dollar’s worst month of the year, averaging a negative return of -0.5%. Though seasonality trends will play second fiddle to trade wars, the broader economic and geopolitical landscape doesn’t bode well for the buck either.
The world waits on tenterhooks ahead of the White House’s announcement on a new set of tariffs on imported goods, which have the potential to reshape global trade and disrupt economic activity. The “blurred visibility’’ approach from Trump on tariffs brings a huge amount of unpredictability – and as a result, it’s difficult for companies to plan ahead with spending and hiring decisions. If the haphazard manner in which the White House has imposed its levies continues, it would likely aggravate the situation and potentially impede economic activity. Indeed, yesterday’s data offered a mix of weaker activity data, cooling labour market signals and surging price pressures.
The ISM manufacturing PMI fell to 49 in March from 50.3 previously, below forecasts of 49.5. The reading pointed to the first contraction in factory activity in three months. The details were also ugly. New orders, employment and production all contracted too, whilst price pressures soared to the highest since June 2022. All this suggests that tariff fears are hurting the US manufacturing sector and consistent with early stages of stagflation. This is negative for risk assets.
Nervous investors are hoping for more clarity on tariff policy, but there’s a chance that uncertainty extends beyond today, which is likely why FX traders are in a wait-and-see mode. Currency markets have been relatively calm over the past few days and implied volatility gauges somewhat subdued in light of circumstances. We think an escalating tariff narrative could provide dollar respite early on due to global risk aversion boosting safe haven flows, but rising US growth scares will come back to haunt the buck. A downtrend would also correlate with the dollar’s path during Trump’s first term. Back then, the dollar index depreciated around 15% from peak to trough during 2017-2018.
What we do know is that the Trump administration is aiming for a challenging trifecta: a weaker USD, lower yields, and a robust stock market. Historically, achieving this rare combination requires highly disinflationary policies to push yields and the USD lower, alongside a supportive Federal Reserve to bolster equity market sentiment. However, the current policy mix – marked by geopolitical shifts, tariffs, and macroeconomic uncertainty – may succeed in weakening the USD and lowering yields, but risks undermining economic growth and stock market performance in the process. This delicate balance highlights the complexities of navigating such ambitious goals without triggering broader financial instability.
Betting on euro strength despite tariff threat
George Vessey – Lead FX & Macro Strategist
European risk assets have been performing relatively well since Trump’s election, with EUR/USD up around 4% and the Euro Stoxx 50 up 8%. The German equity benchmark is up a whopping 13% – turbocharged by the historic German fiscal package. In the run-up to Trump’s announcement today, sentiment has turned more pessimistic though and the European Union said it’s ready to retaliate if necessary if reciprocal tariffs are imposed.
Tariffs risk reigniting inflationary pressures in the short term. Longer-term though, a trade war may weaken growth, turning into a disinflationary force for Germany and the eurozone. Germany’s 10-year Bund yield has fallen to a four-week low below 2.7%, reflecting investor caution amid escalating tensions. Money markets currently price an 77% chance of an ECB rate cut in April, but policymakers remain divided. More policy easing could weigh on the euro via falling relative yield spreads, but given the huge fiscal stimulus plans, the impact on growth and therefore need for aggressive monetary easing may be constrained.
This could be why FX options traders are still more optimistic on the euro’s outlook further down the line. So-called risk reversals, a closely watched barometer of positioning, show investors are the most bullish on the euro over the next month since late 2020. That’s despite the fact the common currency is already enjoying its best start to a year since 2016 and also suggests markets are wagering that a trade war will be more detrimental to the US than Europe.
Sterling looks sturdy
George Vessey – Lead FX & Macro Strategist
In contrast to the US dollar, seasonality plays in sterling’s favour. The pound has delivered the best average monthly returns versus the dollar in the past 20 years in April, and this is thanks in part to UK fiscal year-end flows and portfolio rebalancing. GBP/USD has consolidated around the $1.29 handle for the past four weeks, with no reversal signal identified on the charts yet. As long as the pair holds above the 200-day moving average (currently around $1.28), the path of least resistance should remain to the topside. The pair is up 7% from year-to-date lows of $1.21 and less than 4% away from its 2024 high.
As the pound starts April with support from favourable rate differentials and optimism around seasonality trends, there are doubts emerging that the UK will sidestep the worst of Trump’s looming tariff barrage. The Trump administration has not confirmed which countries will be hit, although it has trailed today’s announcement as a sweeping one. This has somewhat dashed hopes that the UK might float under the radar, though negotiating some sort of deal remains plausible, especially thanks to relatively modest bilateral trade with the US.
For this reason, sterling is being dubbed a tariff hedge of sorts. If Trump’s tariff plans roil global markets, sterling won’t be immune, but it seems to have a few supports that can act as a shield. In a full-blown risk-off move, the dollar tends to dominate, but any rebound in the safe haven could be short-lived if the focus shifts back to US recession fears.
FX in wait-and-see mode
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 31- April 4
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.
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