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Trade tensions are rising after the US enacted 25% tariffs on steel and aluminium imports yesterday and ended previous country-level deals and exclusions. The scope of these tariffs is small at just 4.5% of total US goods imports, with China’s exposure being the greatest, followed by Mexico, the EU, and Canada, according to the St. Gallen Endowment. Following this, both EU and Canada had retaliated with their own tariffs that could affect up to EUR26bn and CAD30bn of US goods respectively. Given national security reasons, US Commerce Secretary Lutnick has affirmed that nothing would stop these expanded tariffs until US domestic production is strengthened, and that copper could also be added to trade protection.
Elevated trade uncertainty has now become a negative for business confidence, for investment, and for growth. Outlook for US exceptionalism could be fading, and even a softer US Feb CPI print of 2.8% y/y (Jan: 3.0%) could only give a muted boost to US stocks yesterday. The DXY is consolidating around mid-103, seeing little boost from escalating trade worries.
Given trade-related risks, the Bank of Canada cut rates by 25bps to 2.75% yesterday, with Governor Macklem saying that the economic hit to Canada may be severe if tariffs are broad and prolonged. USD/CAD remains stable at around mid-1.43 levels following the BOC’s decision, suggesting that markets may have priced in the impact of US tariffs for the CAD.
USD/JPY has bumped up above 148, supported by a rebound in US 10Y yields towards 4.30%. BOJ Governor Kuroda stated in parliament yesterday that he has little problem with rising JGB yields, as they reflect the market’s view on Japan’s economy, inflation, and changes in global rates. This suggests a high hurdle for the BOJ to intervene in the JGB market, even as the 10Y yield rises above 1.50% to its highest since 2008. This should bs supportive for the JPY as it underscores a quiet confidence on the BOJ’s part that reflation is well underway.
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