- Trump announced that tariffs on Canada and Mexico would be implemented starting March 4th.
- Talks between the US president and Ukraine’s president went south.
- Market participants are pricing a 79% chance that the Fed will lower borrowing costs in June.
Currency futures fell on Friday as risk appetite dipped, with traders awaiting the implementation of tariffs on Canada and Mexico. Meanwhile, traders also focused on developments in the talks between the US and Ukraine, which went south. However, risk appetite rebounded by Monday amid renewed hopes of a deal to end the Russia-Ukraine war.
On Thursday, US President Trump announced that tariffs on Canada and Mexico would be implemented starting March 4th. Meanwhile, experts had predicted another delay to April. Therefore, the news was a surprise, leading to a scramble for safety in the dollar. Meanwhile, risk-sensitive currencies like the Canadian dollar and the Australian dollar suffered. Implementing a 25% tariff on goods from Canada and Mexico could lead to trade wars that would significantly impact the global economy.
Elsewhere, talks between the US president and Ukraine’s president went south after the two leaders exchanged harsh words. As a result, hopes for a near-term peace deal fell. However, Britain came in to save the day, rallying behind Ukraine. Support from Europe might give Zelenskiy enough bargaining power to agree to fair terms with Russia. These developments initially plunged the euro before it recovered.
US PCE report (Source: US Bureau of Economic Analysis)
Elsewhere, market participants focused on the US core PCE price index report, which showed inflation in line with expectations. However, the report also revealed weaker-than-expected consumer spending, which pushed up expectations for Fed rate cuts. Market participants are now pricing a 79% chance that the Fed will lower borrowing costs in June.
The Canadian dollar steadied after data on Friday revealed a GDP number that was bigger than expected. Canada’s economy expanded by 2.6% annually, well above estimates of 1.8%. The surge indicated a rebound in the previously weak economy. The Bank of Canada has implemented several rate cuts to support the economy. However, the prospect of a 25% tariff has dimmed the outlook for the economy. Weaker demand will pile more pressure on Canada’s central bank to cut rates, weakening the loonie.
Meanwhile, the Australian dollar suffered the most last week due to a dip in risk appetite. At the same time, data during the week revealed cooler-than-expected inflation, raising expectations for RBA rate cuts.
