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The DXY Index returned gains after US President Donald Trump agreed to delay the 25% tariffs on Mexico and Canada for 30 days in exchange for commitments to enhance border control efforts to crack down on drug trafficking and illegal immigration. The DXY Index initially spiked 1.4% to almost 110 in anticipation of the February 4 deadline for the tariffs to take effect. It ended the overnight session at 108.40, near last Friday’s closing level. USD/MXN pulled back to 20.3, a five-day low, after initially climbing to a 3-year high of 21.3. USD/CAD was poised to establish a new uptrend if it surpassed the 1.47 highs in 2016 and 2020. However, after briefly reaching 1.48, it retreated to 1.44, the mid-point of the 1.43-1.45 range where it traded for most of January.
However, it is too early to celebrate at the outset of US-led global trade tensions. We see the USD maintaining its haven status in 1H25 while acknowledging volatility from Trump’s unpredictability.
Although the S&P 500 Index trimmed its initial overnight loss from -1.9%, it still closed the session 0.8% lower at 5995, worse than last Friday’s 0.5% decline. Trump gave notice that the European Union was next in line for US tariffs. European Commission President Ursula von der Leyen said after an informal gathering of EU leaders in Brussels that the EU would respond firmly to Trump’s tariffs. There was also no 30-day reprieve for the additional 10% tariff on Chinese imports, with markets awaiting responses from the Xi administration.
Given Trump’s outrage against America’s major deficits with Canada and Mexico, stock investors reckoned that Canada and Mexico still needed to do much more to avert tariffs altogether. According to the Financial Times, Trump stated that Canada had a 30-day window to finalize an economic deal. However, Canada is going through a political transition that could complicate or delay this process. Prime Minister Justin Trudeau will step down after a new Liberal leader is selected on March 9. Leading candidates Mark Carney and Chrystia Freeland are vocal critics of Trump’s trade policies and provocation of Canada’s sovereignty. Unfortunately, the ruling Liberal Party is badly trailing the opposition Conservative Party ahead of the October general elections. Opposition leader Pierre Poilievre firmly opposes Trump’s tariffs and is committed to defending Canada’s economic interests through “dollar-for-dollar” retaliatory tariffs on US goods and policy reforms.
The bond market was also unconvinced that the tariff threat to inflation was over. The US Treasury 10Y bond yield rose by 1.6 bps to 4.555% a second session. Fed Presidents Austan Goolsbee (Chicago) and Raphael Bostic (Atlanta) urged caution in lowering interest rates because of inflation risks driven by Trump’s policies. Bostic is paying attention to how tariffs drive inflation expectations, which he reckons clarity would be lacking at the FOMC meeting on March 18-19. Fed Chair Jerome Powell’s semi-annual congressional testimonies on monetary policy next week have become a significant event. Meanwhile, market expects Friday’s US nonfarm payrolls to moderate to 170k in January, after the surprise jump to 256k in January, with the unemployment rate staying unchanged at 4.1%.
Quote of the Day
“Move fast and break things. Unless you are breaking stuff, you are not moving fast enough.”
Mark Zuckerberg
February 4 in history
Mark Zuckerberg launched Facebook from his Harvard dormitory room in 2004.
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