From Maple Syrup to Tequila

January 21, 2025

6 min read

Elias Haddad

From Maple Syrup to Tequila

President Trump threatened to impose tariffs of as much as 25% on Canada and Mexico by February 1. MXN and CAD underperform.

UK January labor force survey was mixed. Labor demand cools but wage growth accelerates. BOE still on track to cut the policy rate next month.

Canada and New Zealand report inflation data today.

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It did not take long for US President Donald Trump to jolt the markets. USD initially fell yesterday as Trump held off imposing broad tariffs on his first day in office. However, the USD pullback was stopped in its tracks after Trump threatened to impose tariffs of as much as 25% on Mexico and Canada by February 1. Specifically, Trump said “we’re thinking in terms of 25% on Mexico and Canada… because they’re allowing vast numbers of people [into the US]…I think we’ll do it Feb. 1.” The comments triggered a sharp decline in MXN and CAD against all major currencies while US equity futures had a modest kneejerk downside reaction.

Regardless of US action on tariffs, the fundamental USD uptrend is intact. First, the US economy is in a sweet spot (solid growth and modest disinflation) and outperforming other advanced economies. Second, the prospect for looser fiscal policy will force the Fed to keep policy restrictive for longer. Third, expectations for a lower US corporate tax rate and a wave of deregulation should boost foreign portfolio and FDI flows to the US. Fourth, the favorable US productivity landscape will lead to low inflationary economic growth which translates to higher real interest rate.

Canada’s government has made clear it is ready to strike back with retaliatory tariffs if the US moves ahead with tariffs. Finance Minister Dominic LeBlanc warned “We have spent the last number of weeks preparing potential response scenarios for the government of Canada, in partnership with provinces and Canadian business leaders and union leaders.” An all-out trade war between Canada and the US will be a significant drag on Canada’s economy and lead to further weakness in CAD. Canada’s exports to the US make-up more than 20% of its GDP.

Canada December CPI is the data highlight today (1:30pm London). Headline CPI is expected at 1.9% y/y vs. 1.9% in November while core CPI (average of trim and median CPI) is anticipated at 2.45% y/y vs. 2.65% in November. With Inflation stabilizing around 2%, the Bank of Canada is expected to slow the pace of easing following two consecutive 50bps rate cuts. The market implies about 70% odds of a 25bps BOC rate cut to 3.00% at the January 29 policy-setting meeting.

GBP ignored the mixed UK January labor market report. Labor demand cooled as the number of employees on payrolls dropped by -47k in December after a decline of -32k the previous month. The unemployment rate rose one tick to 4.4% in November vs. Bank of England Q4 projection of 4.2%. Meanwhile, UK wage growth quickened more than anticipated. Total average weekly earnings ex-bonuses rose 5.6% y/y (consensus: 5.5%) vs. 5.2% in October. The policy-relevant, private sector earnings ex.-bonuses surged to near a one year high at 6.0% y/y vs. 5.4% in October and tracking well above the Bank of England’s (BOE) Q4 projection 5.1% y/y. Faster UK wage growth underpins consumer spending activity and reduces the risk the BOE delivers 75bps of total rate cuts in the next 12 months. Bottom line: ECB/BOE policy trend favors a lower EUR/GBP.

EUR/USD should remain under downside pressure. The Eurozone’s soggy growth outlook leaves plenty of room for the ECB to bring down the policy rate within the neutral range - estimated at around 1.50% to 3.00%. Indeed, ECB Governing Council member Peter Kazimir noted that the bank’s intention is to cut rates to neutral, which is “probably closer to 2% than to 3%.” Kazimir added that an ECB rate cut next week is a done deal while “three or four cuts in a row are feasible.” Markets price-in 100bps of total ECB easing over next 12 months that would see the policy rate bottom around 2.00%. Germany’s January ZEW investor economic sentiment survey is up next (10:00am London).

NZD/USD faces more downside potential. New Zealand’s Q4 CPI (9:45pm London) is expected to validate the case for additional RBNZ rate cuts. Headline CPI is expected at 2.1% y/y vs. 2.2% in Q3. Inflation is converging towards the 2% target mid-point and measures of core inflation have declined to within the 1-3% target range. Moreover, firms’ inflation expectations are now close to 2% across all time horizons. The RBNZ has penciled-in another 50bps rate cut to 3.75% in February but warned of slower pace of easing after that, adding it does not forecast to slash the policy rate below neutral (around 3%) throughout 2027. Markets agree and price in the Official Cash Rate to bottom at 3.00% over the next 12 months.

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