FX Update: Trump tariff headlines roil markets

CAD rallies on Trudeau’s potential exit
Elsewhere, Canada’s Globe and Mail suggested in a piece overnight that Canadian prime minister and Liberal party leader Justin Trudeau is set to step down as party leader, which would lead to a contest for his replacement and an eventual snap election. CAD jumped overnight and is following through to the strong side on the general USD weakness in the early European session Monday. Given Trump’s contentious relationship at times with Trudeau and Trump’s transactional approach, Canada would look far better positioned with a new PM (the Conservative’s Pierre Poilievre) that is on the “right” side of the political spectrum and is already appealing to Trump’s nature with language on making a “great deal” with the US president. Looking at US FX futures positioning, the CAD short is enormous and if Trudeau follows through and resigns, this could feed a sizeable sentiment shift on the Loonie.

Even risk highlights for the week ahead:

• Canadian politics: Will CAD follow through stronger on an actual Trudeau resignation this week. Canadian snap elections could be on the calendar in less than two months on a Trudeau exit.
• US Earnings season kicks off at end of week. Always interesting to track the US economy through the patchwork of companies that are reporting earnings in the coming weeks, with the major US banks kicking off earnings season on Friday and early next week.

Today:

• Germany Flash Dec. CPI – CPI expected to pick up again for December to 2.6% YoY and the trajectory has been flat at above 2.0% on average since early 2024 unless 2025 brings fresh disinflationary trends.
• US Treasury auctions 3-year notes - the market may be sensitive to US treasury auction dynamics, given that yields are near recent highs.

Tuesday

• Switzerland Dec. CPI. Expected to drop to 0.6% YoY, encouraging the anticipation that the Swiss policy rate is headed to zero by mid-year.
• Eurozone Dec. Flash CPI. Expected to tick higher to 2.4% YoY after 2.2% in Nov.
• US Nov. JOLTS job openings. Ticked up strongly in October, but the trend is lower. It’s a month slower than other US labor market data points.
• US Dec. ISM Services. The survey dropped in November after an odd Sep-Oct surge. Expected at 53.5 after 52.1 in November.
• US Treasury auctions 10-year notes The key 10-year rate near recent cycle peaks above 4.60% to start the week, key for the USD outlook.

Wednesday

• Australia Nov. CPI. The trimmed mean rose to 3.5% YoY in September, supporting the RBA’s hawkish hold on rates.
• Sweden Dec. Flash CPI – the core YoY figure expected at 2.2% after 2.4% in Nov. Market is trying to time whether Riksbank only eyeing one last 50 basis point cut for the cycle – about 40 basis points of cutting priced for the Jan 29 meeting.
• US Dec. ADP Employment change. Expected at +133k after +146k in Nov.
• US Weekly Initial- and Continuing Jobless Claims – nothing seems to change here, with very low initial claims while continuing claims have been elevated (big drop last week in continuing claims, however), suggesting a labor market in which few are being fired, but those out of work are having a hard time finding jobs.
• US Treasury auctions 30-year T-bonds. A measure of the demand for the longest term US treasury debt.
• FOMC meeting minutes – some nuances in the discussion could prove interesting, but the Fed task has largely been one of unwinding forward guidance, a necessity in an age of increasing fiscal dominance.

Thursday:

• Japan Nov. Labor Cash Earnings. BoJ governor Ueda has noted the focus on earnings in trying to understand inflation dynamics, although the bigger key is the spring round of wage negotiations in Japan.
• China Dec. CPI and PPI. China’s PPI has dropped into deeply negative territory at -2.5% in November and the CPI is barely above zero – expected at +0.1% YoY in November as the country is in the throes of a balance sheet recession. The Chinese 10-year sovereign bond yield has collapsed to 1.6% from above 2.0% over the last two months. Domestic demand stimulus is a must to drive reflation.
• Germany Nov. Industrial Production. Germany’s industry is in decline and will remain that way until cheaper energy is available to revive it as a minimum prerequisite. October saw a -4.5% YoY print and the country’s overall industrial output is down nearly 17% from the 2017 peak in volume terms.
• US markets closed Thursday to mark day of mourning for former president Jimmy Carter, who died last week.

Friday

• Norway Dec. CPI. Core CPI popped back up to 3.0% in November after a post-pandemic low of 2.7% in October. December expected at 2.8%.
• Canada Dec. Jobs data. Focus in Canada is now much more on domestic politics and whether Trump will follow through with tariff threats. The CAD short is very extended. Canada’s economy is in bad shape and the unemployment rate expected to hit a new cycle high of 6.9% after 6.8% in November
• US Dec. Jobs Report. The trend has been lower in private payrolls, but got extremely choppy over the lasts three months, in part on possible storm impacts in October, but we should be clear of these now. The market will respond to strong surprises (for example 4.1 o4 4.3% in Unemployment Rate vs. 4.2% expected or strong payrolls surprise), but focus is on politics and policy.

Table: FX Board of G10 and CNH trend evolution and strength.

Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.

A possible big shakeup here as the US dollar has been sent reeling on the Trump tariff news - bears tracking in coming sessions to say the least as USD strength has been the dominant trend.

Table: FX Board Trend Scoreboard for individual pairs.
Some spectacular trend readings in the USD/commodity dollar pairs – these are looking very stretched, but if the current bout of risk aversion deepens badly, the US dollar can continue to extend before something gives.

The long USD trends far from being unwound in any of the USD pairs, although spot gold in USD has flipped back to positive and silver won't be far behind if it holds above 30 per ounce.