CAD, EUR, JPY flows: CAD bounces on tariff reprieve, EUR and JPY have upside scope

Trump’s decision to delay Mexican and Canadian tariffs for a month has reversed the CAD and MXN weakness seen on Monday, suggesting the markets now believe the tariffs won’t happen at all. This is certainly better for all concerned, but we would still expect some degree of concern in the markets at the potential for destructive policies from the Trump administration. It’s notable that while almost all currencies have returned to Friday’s closing levels against the USD, the EUR has not, perhaps suggesting that the market now anticipates a tariff against the EU but doesn’t expect the Canadian and Mexican tariffs to be reinstated. This is certainly possible, given the EU trade surplus and the tariff on China, and would make a little more sense than targeting North America. But at this stage it is an assumption, and given the reversals elsewhere the risks should be on the EUR upside.

The JPY has also fallen back on the news that the tariffs on Canada and Mexico have been suspended, but USD/JPY continues to look extended relative to the yield spread correlation, and we still see downside risks. The imposition of the tariff on China and the threat of a tariff on the EU underlines that there are risks to global equities and this should be JPY supportive, even though equity futures have nearly returned to Friday’s close. We see upside scope for the JPY against a range of currencies, and with JGB yields on the rise CHF/JPY looks like a clear target, with JPY yields now above CHF yields along the whole curve.