Market Brief: Tariff Confusion Leaves Currency Markets Rudderless

The US dollar is inching higher against most of its rivals—with the exception of the safe-haven Swiss franc—as investors monitor signs of an impending economic slowdown amid deepening uncertainty over the Trump administration’s tariff plans. Benchmark ten-year Treasury yields are holding just below the 4.3-percent threshold after fully unwinding their post-election gains, North American equity futures are setting up for an almost-unchanged open, and foreign exchange rates are displaying signs of broad-based risk aversion.

The Canadian dollar and Mexican peso are almost unchanged after President Trump appeared to say that levies on the two countries would take effect on April 2, suggesting a possible delay in implementing near-universal 25-percent tariffs, which were previously scheduled to be imposed next week. The comments, which came before a cabinet meeting, were extremely difficult to parse, leaving traders unsure as to whether the president was conflating different concepts or signalling an actual policy shift—and the confusion wasn’t alleviated when Howard Lutnick, the commerce secretary, interjected to note that Ottawa and Mexico City had to satisfy the president’s demands on fentanyl, suggesting the tariffs could still take effect next week. “We support Canada $200 billion a year in subsidies one way or the other,” Trump said. “We let them make millions of cars. We let them send us lumber. We don’t need their lumber. We’re going to free up our lumber… Without us, Canada can’t make it. You know, Canada relies on us 95 percent. We rely on them 4 percent. Big difference. And I say Canada should be our 51st state. There’s no tariffs, no nothing”.

The euro is exhibiting surprising stability as signs of growing cohesion among European leaders on the need for more defence spending offset a renewal in American tariff threats. President Trump reserved his harshest criticism in yesterday’s comments for Europeans, saying “They’ve really taken advantage of us in a different way. They don’t accept our cars. They don’t accept essentially our farm products, they use all sorts of reasons why not”. “Let’s be honest,” he said, “the European Union was formed in order to screw the United States. That’s the purpose of it. And they’ve done a good job of it”. When questioned about tariffs, Trump said “We have made a decision and we’ll be announcing it very soon. It’ll be 25 percent, generally speaking,” but then muddied the waters by saying “that will be on cars and all other things”.

Even after Trump's comments, implied volatility in currency markets remains low, suggesting that traders still don’t see his rhetoric translating into implemented policy. We don’t have any particular insight into the president’s mindset, but this does seem somewhat dangerous, given that so many administration officials remain committed to an isolationist stance and are aligned behind a protectionist policy framework. Tariffs still represent a significant risk for many of America’s biggest trading partners, and it would be surprising if volatility didn't spike again in coming weeks.

Markets escaped unscathed when last night’s fourth quarter earnings report from Nvidia beat expectations, but did so by a narrower margin than investors had become accustomed to. The artificial intelligence bellwether said sales in the three months ending in January climbed to $39.2 billion—matching investor estimates—and provided guidance showing that although revenues could rise to $43 billion in the fiscal quarter ending in April, higher production costs associated with next generation of chips could translate into slower profit growth. The company, which commands a market capitalisation exceeding $3.2 trillion, has become an important factor in driving short-term movements in currencies like the Canadian dollar, which are sensitive to changes in global risk appetite.

Labour markets are showing signs of gradual cooling. The number of Americans filing initial claims for unemployment benefits climbed to 242,000 in the week ended February 22—exceeding estimates set closer to the 221,000 mark—and 1,862,000 continuing claims were submitted in the prior week, bringing the four-week moving average up to 1,865,000. Job cuts made by Elon Musk’s ‘Department of Government Efficiency’—by our estimates now approaching the 30,000 mark—haven’t had a material impact on claims numbers thus far, but we do expect more generalised government downsizing to begin putting upward pressure on unemployment numbers in the months ahead.

Falling consumer sentiment levels are not yet weighing on broader consumption and investment patterns. Durable goods orders and capital investment climbed more than expected last month, suggesting that underlying demand remained strong, and showing that some businesses could be working to front-run potential tariff increases. According to the Census Bureau, new orders for manufactured goods meant to last more than three years increased 3.1 percent from December, beating estimates for a 2-percent gain. Core capital goods orders—a measure of underlying investment in equipment that excludes volatile aerospace and defence-related categories—rose 0.8 percent month-over-month, up from 0.2 percent in the prior month.

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