Market Brief: Markets Go Quiet Ahead of Tariff Decision

Trading activity is subsiding across financial markets this morning as participants prepare for today’s US job openings and Institute for Supply Management reports, and brace for tomorrow’s tariff decision. Equity markets are giving back some of yesterday’s late-session gains, ten-year Treasury yields continue to edge lower, and the greenback is trading flat against its major counterparts.

Currencies look largely rangebound, but the euro is trading with a softer bias after bloc-wide inflation slowed last month, clearing the way for a rate cut at the European Central Bank’s April meeting. According to an update published by Eurostat this morning, consumer prices climbed 2.2 percent in the year to March, down from 2.3 percent in the prior month, while a measure of core underlying pressures eased unexpectedly to 2.4 percent. Services inflation—which had been a key area of concern for members of the Governing Council—dropped to 3.4 percent, well below the 3.9 percent recorded in January. Yesterday’s conviction and political ban of French far-right leader Marine le Pen in an embezzlement case has left the common currency unmoved, suggesting that traders don’t expect the calculus underpinning the bloc’s fiscal position to shift dramatically in response.

President Trump is scheduled to unveil his next round of tariffs at an event in the Rose Garden at 3:00 eastern time tomorrow afternoon. With major questions remaining around the scale, scope, and timing of the administration’s actions, we don’t know how foreign exchange markets will react—but free-floating currencies* linked to the largest bilateral US goods trade deficits are the most obvious candidates for significant moves as investors recalibrate economic expectations. Today’s release of the administration’s investigative reports on trade imbalances could help clarify exposures—but could equally act as a red herring, given that it isn’t entirely clear that the reduction of deficits is really Trump’s end goal.

The Canadian dollar and Mexican peso could swing slightly more dramatically, given that many market participants expect Trump to signal an easing in tariffs on both of America’s closest trading partners. Governments in Ottawa and Mexico City have made modest concessions—taking symbolic steps to tighten border security and telegraphing a willingness to tighten restrictions on Chinese imports—but populations in both countries have rallied behind their leaders, demonstrating overwhelming support for retaliatory measures against the US levies. Mexican President Sheinbaum has seen her domestic ratings soar and Mark Carney, the new leader of Canada’s Liberal Party, is sitting on a strong lead in prediction markets ahead of the April 28 federal election, suggesting that Trump’s sabre-rattling is facing diminishing returns.

The ingredients are not in place for a technically-driven move in currency markets. The sort of imbalances that preceded last year’s unwind in the Japanese carry trade don’t look material at the moment, and although hard data on positioning in widely-dispersed over-the-counter markets is difficult—if not impossible—to come by, anecdotal evidence would suggest that trading desks and major buy side participants have trimmed directional positions and are keeping their powder dry ahead of the announcement. Implied volatility levels look relatively reasonable.

But a wide range of outcomes is possible. The president has already executed what amounts to the most significant shock to global trade since the Great Depression and one of history’s biggest one-off tax increases on American citizens. Our base case is that the announcement will prove somewhat inconclusive, but if Trump chooses a fairly conciliatory path—especially one that sets out clear negotiation off-ramps—the overall increase in tariffs could be relatively modest and leave existing market assumptions largely unchanged. If he instead raises tariffs in line with the recommendations of his most extreme advisors, the ratio of duties to goods imports could surge above the 30 percent threshold, delivering a devastating shock to the global economy.

Watch your tails. We rarely make product recommendations in this forum, but currency collars (range forwards)—in which hedgers sacrifice potential participation in a favourable move in exchange for protection against an unfavourable move—look very reasonable at this juncture, given relatively-tame volatility levels and the potential for an absurdly-large move in markets. Tomorrow's announcement could be a non-event and prevailing trading ranges could remain intact—meaning that the floor and ceiling rates embedded in a collar go untouched—but trying to catch a falling knife in the chaos that could follow a shock might also prove extremely painful.

*The Vietnamese dong and Chinese yuan are managed against currency baskets, and the Taiwanese dollar often bears signs of stealth intervention to stabilise its value.

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