Written by the Market Insights Team
CAD soars in best 3-day run since 2020
Kevin Ford – FX & Macro Strategist
The USD/CAD has marked its best three-day streak since March 2020, a remarkable performance that comes without any shifts in Canadian fundamentals to explain the movement. Canada’s economy remains under pressure from tariffs, with the U.S. continuing to dominate imports—a situation that has yet to see significant change or relief. Compounding concerns are the results from recent Bank of Canada surveys, which highlight consumers’ growing recession fears and businesses hesitating on investment and hiring decisions. These challenges paint a grim picture, especially in light of March payroll data revealing a loss of 33,000 jobs, the largest decline in three years. Also, while the spread in the 2-year US-CAD rate differential has narrowed in recent weeks (down 35 bps from its 2025 peak), it doesn’t fully account for the recent CAD strength below the 1.39 mark.
The broader economic landscape adds further strain on the Canadian dollar. CAD, as a cyclical commodity currency, remains particularly vulnerable amid ongoing trade wars that weigh heavily on global growth and trade activity. Additionally, the negative effects of tariffs are unlikely to subside until the CUSMA/USMCA undergoes renegotiation. The Bank of Canada, facing limited capacity to address tariff-induced inflation pressures, is constrained in its ability to support CAD, leaving it susceptible to risks such as tariff escalation, weakening domestic economic indicators, or hints of a global slowdown.
Interestingly, last week’s appreciation of CAD against USD stems entirely from a shift in US dollar sentiment, driven by risk aversion. During risk-off periods, emerging markets often see higher yields paired with weaker currencies—a pattern reminiscent of the fiscal budget crisis under former UK Prime Minister Liz Truss, which sent gilt yields soaring while the pound sterling plunged. However, sentiment has shifted dramatically, with the US dollar’s status as a safe-haven asset experiencing a notable decline. Despite CAD erasing most losses incurred since the 2024 US elections, it remains one of the G10 currencies performing poorly against the US dollar this month, alongside the Aussie and the Kiwi.
This interconnected narrative underscores the challenges facing CAD and the broader Canadian economy. The combination of domestic vulnerabilities, global uncertainties, and shifting market sentiment creates a complex dynamic that leaves the Loonie benefitting momentarily from US dollar weakness, although struggling to find solid ground.
Confidence crisis could extend
George Vessey – Lead FX & Macro Strategist
The US dollar index fell below 100 for the first since time 2022, dropping a whopping 3% last week – as its flipped from a safe haven to more like a risk-sensitive currency. In fact, US stocks, bonds, and the dollar have all faced simultaneous declines, amplifying fears of a mass retreat by foreign investors from US assets. Trade was fears were fanned by China’s finance ministry announcing a 125% tariff on US goods, escalating retaliatory measures. Meanwhile, the US now imposes a combined 145% tariff on Chinese imports, including a 125% duty and an additional 20% levy tied to fentanyl-related trade.
Last week was a rollercoaster week for markets. Equities, slumped, pumped and slumped again on tariff-related headlines. Long-dated Treasury yields spiked, while the dollar has experienced its steepest drop against the euro and Swiss franc in a decade. Once considered the ultimate safe haven, US Treasury bonds are now under scrutiny as President Trump’s aggressive trade policies disrupt global markets. The introduction of reciprocal tariffs rapidly shifted the dollar’s status from a favoured currency to a gauge of risk aversion, reflecting growing uncertainty and diminishing confidence in US financial stability. Indeed, the inverse correlation between US yields and the dollar highlights this stark regime shift, but how long could it last?
At this point, trying to predict a bottom for the dollar is as uncertain as forecasting President Trump’s next tariff decision. The dollar, much like Treasuries, has shifted from its traditional role as a safe haven to behaving like a risk-sensitive asset. This dynamic means the USD can rally alongside struggling equities if there’s even a glimmer of positive trade news. However, it seems that only a significant rollback of protectionist policies—especially those targeting China—can truly repair the damage inflicted on the dollar over the past two weeks.
Euro has flipped from risk asset to safe haven
George Vessey – Lead FX & Macro Strategist
The euro continues to attract substantial USD outflows, allowing EUR/USD to hit a fresh 3-year high above $1.14 recently. Last week we saw the pair rally over 4% in two days – its best 2-day streak since 2009.
Its appeal as a liquid reserve currency, combined with market optimism that the EU will avoid escalating trade tensions with the US, has buoyed its performance alongside Europe’s current account surplus and German’s historic spending plans.
However, much of the recent surge is largely driven by weakening confidence in the dollar, with little justification from short-term rate dynamics. Notably, the EUR-USD two-year swap rate gap has widened further in favour of the dollar, suggesting a fair value closer to $1.05. That said, given the extreme volatility and unconventional trends, such calculations require caution. Markets are pricing in a 95% chance of a rate cut by the European Central Bank this week. A surprise hold could see the pair shoot above $1.15 especially amidst ongoing volatility and thin liquidity in the FX space.
Pound plagued by volatility
George Vessey – Lead FX & Macro Strategist
The British pound surged past $1.30 and peaked over $1.31 versus the US dollar last Friday, nearing a six-month high as the dollar confidence crisis gathered steam. However, with enhanced flows into the euro, GBP/EUR sunk below €1.15 for the first time since late 2023. This month alone, the pair has dropped 3.6% – on track for its largest monthly decline since 2016 and diverging (in a big way) from UK-German real rate differentials.
On the macro front, UK GDP surprised to the upside with 0.5% growth in February – five times the forecasted rate. This growth, supported by contributions from all major sectors, was bolstered by stronger factory output, likely driven by stockpiling ahead of President Trump’s new tariff measures.
The upbeat economic data slightly tempered expectations for aggressive Bank of England rate cuts, though markets still anticipate three quarter-point reductions in 2025.
This week, FX markets will be hoping for a breather after last week’s heightened volatility. Attention might divert towards macro data again, with the labour market and inflation reports from the UK top on the domestic docket.
DXY drops below the 100 level
Table: 7-day currency trends and trading ranges
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 14-17
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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