The threat of tariffs remains the primary driver of the current market environment, making it difficult to say that Canada has successfully escaped this risk, even though the tariffs have been delayed until April. Meanwhile, political uncertainty in Canada continues to weigh on the CAD, adding further pressure.

USD: Still the king

The USD has been on the softer side over the past week, partly due to improved risk sentiment, a slight boost from ceasefire discussions, and skepticism surrounding recent tariff announcements. Markets appear to be discounting the severity of the proposed tariffs, possibly calling Trump's bluff regarding their actual implementation. However, the broader outlook for the USD remains supported by a resilient economy, a hawkish FOMC, and the persistent risk posed by tariffs despite market doubts. Notably, Trump has indicated that he is likely to impose 25% tariffs on automobile, semiconductor, and pharmaceutical imports, with an announcement expected as soon as April 2. Additionally, Trump previously tasked the U.S. Commerce Department and Trade Representative with conducting a comprehensive review of trade deficits, which is due by April 1, suggesting he may be awaiting the official findings before taking further action. Another key event to watch is March 12, when Trump is set to implement an additional 25% tariff on steel and aluminum. In the absence of successful negotiations with U.S. trade partners securing exemptions before these deadlines, ongoing trade policy uncertainty is likely to remain a supportive factor for the USD until greater clarity emerges.

Domestically, the January FOMC minutes reinforced a clear message that the Fed is in no rush to cut rates again. Instead, policymakers seek confirmation that inflation is steadily returning to target and/or that labor market conditions are easing. The tone of the minutes was consistent with Chair Powell’s remarks and other Fed officials’ statements following the January FOMC meeting, adding little new information. Currently, markets anticipate only one rate cut from the FOMC this year, likely in the second half of 2025, which has provided further support for the USD, particularly against currencies of central banks leaning toward additional easing. Consequently, aside from policy uncertainty related to Trump’s trade stance, the divergence in monetary policy between the Fed and other central banks, coupled with economic resilience, continues to fundamentally support the USD.

Looking ahead, market attention will turn to the U.S. January PCE report, the Fed’s preferred measure of inflation. While the recently released January CPI and PPI figures came in hotter than expected, components linked to the PCE report from both releases showed signs of softening. A weaker-than-expected PCE reading would further reinforce the Fed’s current stance—that the disinflation process remains on track, but policymakers are in no rush to cut rates as they require more time to assess the broader inflation trajectory, which could be affected by potential tariffs. Meanwhile, markets will continue to monitor ceasefire negotiations between Russia and Ukraine, as well as any further developments in U.S. trade policy.

CAD: Tariffs threat

The baseline outlook for CAD remains bearish, primarily due to high exposure to US trade policy risks and increasing domestic political uncertainty. However, CAD has recently found some short-term support from the delay in US tariffs and a stronger-than-expected CPI report. The January CPI release showed headline inflation rising to 1.9% y/y from 1.8%, while core inflation ticked up to 2.7%, indicating persistent price pressures. Markets currently expect the BoC to remain on hold in March and April before delivering two rate cuts, bringing the terminal rate to 2.5% by mid-year. Despite this near-term strength, the recovery is likely to be short-lived, as external risks—particularly US trade policies—continue to pose significant downside risks. Potential tariffs on key Canadian industries (autos, semiconductors, and pharmaceuticals) could disrupt supply chains and weigh on growth, while uncertainty around steel and aluminum tariffs adds further pressure to the trade outlook.

On the domestic front, Canada’s political landscape is undergoing a major shift ahead of the 2025 federal election, with Mark Carney’s entry into the Liberal leadership race introducing fresh uncertainty to what was once considered a likely Conservative victory. A potential early election, should Carney secure leadership on March 9, could heighten political instability, weighing on investor sentiment toward CAD. Looking ahead, CAD’s economic calendar is relatively light, with no major market-moving events. As a result, external factors, particularly trade tensions and the domestic political risks, will remain the primary drivers for CAD, with external vulnerabilities expected to outweigh domestic data for the time being.

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