Written by the Market Insights Team
Loonie breaks below 1.40
Kevin Ford – FX & Macro Strategist
During periods of market stress, like the Great Financial Crisis (GFC) in 2007 or the Covid-19 shutdown, equities tended to sell off while the US dollar gained strength as investors turned to safe-haven assets. Traditionally, this created a negative correlation between equities and the greenback. However, that relationship has shifter. President Trump’s policy reversals, combined with growing uncertainty and tariff-related tensions, have caused the US dollar and US assets to behave more like risky assets, resembling those of emerging markets.
The weaker dollar brings its own set of challenges. While the Fed’s preferred inflation metric eased to 2.8% year-over-year in March, down from 3.1% in February, a combination of a declining USD and a 10% tariff could reignite inflationary pressures in the second half of 2025. Minneapolis Fed President Neel Kashkari highlighted that tariffs have raised the bar for adjusting interest rates, even in the face of rising unemployment. As Kashkari noted, “in my view, the hurdle to change the federal funds rate one way or the other has increased due to the tariffs.”
This perspective contrasts with Scott Bessent’s remarks during his January confirmation hearing for Treasury Secretary. Bessent argued that a 10% tariff could lead to a 4% appreciation in the dollar, effectively offsetting the tariff’s impact on consumers. The US Dollar index has lost 9% over the past 3 months.
Meanwhile, the Canadian dollar has capitalized on the dollar’s struggles. Even as risk-off sentiment resurfaced late in the week, the USD/CAD pair gravitated toward strong support levels in the 1.405–1.41 range, later breaking the critical multi-year support level at 1.40, where the 200-day SMA sits. Now it has closed below this threshold, making a low of 1.384, level not seen since November 2024. Further downside towards 1.38 seems plausible, though the current move appears overstretched in the short term.
Dovish Banxico
Kevin Ford – FX & Macro Strategist
According to the minutes from the March 26, 2025, meeting of the Banco de México Governing Board, the early months of 2025 witnessed a moderation in economic activity, with both advanced and emerging economies experiencing reduced momentum. Growth projections have been scaled back, leaning towards a pessimistic outlook as risks accumulate.
Domestically, the Mexican economy is facing its own share of challenges. A slowdown persisted into the first quarter of 2025, following contractions in agriculture, industry, and other sectors during the final months of 2024. This dip in activity has spilled over into domestic demand, with both consumption and investment taking a hit. Although manufacturing exports have shown some signs of recovery, the labor market remains under pressure, with fewer jobs being created and formal employment declining.
Inflation figures for March 2025 revealed a headline rate of 3.67%, driven by fluctuations in services and merchandise prices. While Banxico foresees inflation converging to its target of 3% by late 2026, risks persist, stemming from broader economic weakness. Against this backdrop, the Governing Board unanimously decided to lower the interbank interest rate by 50 basis points to 9.00%. This move aims to balance inflationary concerns with a need to invigorate economic growth, paving the way for potential rate cuts while maintaining vigilance over inflation.
Adding complexity to the mix are uncertainties tied to U.S. trade policies and tariff measures, which could exert pressure on both inflation and Mexico’s economic performance. On a brighter note, Mexico’s peso appreciated slightly, and government bond yields dipped, signaling relative stability in financial markets despite looming uncertainties.
Through these discussions, Banxico reaffirmed its commitment to curbing inflation and supporting economic stability, even as the global and domestic landscapes present mounting challenges.
Banxico is likely to lower rates by 50 basis points in May and June, and then by 25 basis points in August and September. By the end of the year, the reference rate could reach 7.50%. However, these cuts will largely depend on how many times the Federal Reserve reduces rates this year.
Euro soars to 3-year high
George Vessey – Lead FX & Macro Strategist
The euro surged to a three-year high against the US dollar amid tariff-driven market volatility, as investors offloaded US assets and sought safety in haven currencies backed by current account surpluses. There could be scope for more upside too as FX options traders are the most bullish on the euro in five years according to 1-month risk reversals.
As well as traders offloading US assets, the European Union’s measured approach in the global trade war is also bolstering the euro’s prospects. EUR/USD surged over 2% on Thursday – its largest daily gain since 2015. This rally aligns with news that the EU may delay its countermeasures to US tariffs, just as President Trump announced a pause on tariffs against most nations. Earlier, the EU had approved tariffs targeting €21 billion worth of US imports.
This de-escalation could ease tensions between the US and EU, reducing the European Central Bank’s (ECB) urgency to cut rates at its upcoming meeting. The ECB has already reduced its benchmark rate by 150 basis points in this cycle, and markets are pricing an over 90% chance of another cut next week. If the ECB holds steady, the euro could gain further support.
Pound eyes worst week since 2022 versus euro
George Vessey – Lead FX & Macro Strategist
Sterling is back up above $1.30 versus the US dollar, around 1% higher on the week as investors continue to shun US assets. However, a parabolic rise in the euro, helped by its current account surplus – is dragging GBP/EUR to its worst week since 2022. Stronger-than-expected UK GDP data this morning should offer some support to the pound in the short term.
The UK economy surprised analysts by growing 0.5% in February, as reported by the Office for National Statistics. This rebound follows a slight contraction in January and offers a temporary boost for Chancellor Rachel Reeves amid looming concerns over the impact of President Trump’s tariff policies. The growth in February may represent a fleeting moment of expansion, with the global trade war expected to weigh heavily on business investment and consumer spending in the coming months.
Meanwhile, as we highlighted might happen yesterday, the Bank of England has dropped plans to sell down its stock of long-dated bonds next week in response to recent market turmoil and will instead sell shorter maturity gilts, a move that will ease pressure on the UK’s long-term borrowing costs. The announcement on Thursday follows a sharp sell-off in the price of UK sovereign bonds with 10- and 30-year maturities, which sent yields soaring to 27-year highs.
Usually, currencies move in tandem with yields, but the pound was declining in a sign that the gilt market remains an Achilles heel for sterling. Indeed, despite the 1-week change in UK-German yield spreads jumping by the most in two years, GBP/EUR’s 1-week change has been the biggest drop in three years. UK inflation data next week will further test the gilt market and the pound, especially if it prints higher than expected.
CAD hits lowest since November 2024
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 7-11
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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