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Loonie Surges; Global Trade War in the Making?

Published March 22, 2018
  • The FOMC raised rates by 25 bps yesterday and surprised the market by keeping the dots for 2018 unchanged to imply 3 hikes this year. The dots can still shift during the June meeting. From an FX perspective, the key message is that the Fed intends on being very gradual with no urgency to accelerate the hiking cycle, meaning the market could move on from the Fed narrative, particularly with respect to it being a supportive driver of USD.
  • The concession by the United States on US content for vehicles is very positive news for progress in NAFTA talks and has sent the loonie on a tear. USD/CAD and USD/MEX have traded lower following comments yesterday from US Trade Representative Lightizer that a great deal of progress has been made on NAFTA negotiations, confirming the positive tone of news flow this week. The White House is also expected to announce the tariffs on China today, with new reports out that the US will retaliate to any potential countermeasures from China, a step in the wrong direction from de-escalation of the current trade tensions.
  • President Donald Trump is expected to announce tariffs targeting $60 billion of Chinese imports in a move aimed at curbing theft of US technology that is likely to trigger retaliation from Beijing and stoke fears of a global trade war. The threat of a global trade war and a steady message from the Federal Reserve on US interest rates pushed the greenback to its lowest in over a month today, and took Europe’s main share markets into the red. It was the dollar’s third decline in four sessions, while Britain’s pound was helped to a six-week high after a Bank of England policy meeting laid the foundations for another UK rate increase in the coming months.
  • Oil prices surrendered early gains today as investors booked profits after this week’s rally, but losses were limited by the ongoing efforts of OPEC and its allies to curb supplies. Brent Crude is down ~1.27% on the day with WTI Crude down ~1.10%, trading at about $67.10 and $64.55/barrel, respectively, at the time of writing.