President Trump will announce the final tariff plan today. If the plan aligns with his previous statements, we can expect significant market volatility, particularly for the USD and commodity currencies such as CAD, AUD, and MXN. However, any positive surprise in the announcement could immediately invalidate this outlook by triggering a positive risk sentiment.

USD: Today is big day

Recently, market sentiment has turned sharply bearish on the near-term outlook for the US economy. In particular, concerns are growing that policy uncertainty could weigh on consumer and business confidence, ultimately dampening domestic demand. The key focus remains on the announced and planned US tariffs, with many looking ahead to April 2, when the Trump administration is set to announce reciprocal tariffs against its trading partners. However, ahead of this so-called "Liberation Day," official statements and media reports suggest that the trade levies may target specific sectors, such as autos, and in some cases, could be delayed or used as a negotiation tool. Turning to FX, tariffs have traditionally been seen as negative for risk sentiment but positive for the safe-haven USD. However, the impact of next Wednesday’s tariffs should be mitigated by market fears of a US recession. Likewise, if the US imposes tariffs with a phase-in period, the hit to risk sentiment would be less severe, potentially making them less supportive for the USD. That said, if the tariff announcement aligns with expectations—either without new levies or with delays—it could provide some strength to the USD.

On the domestic front, headline PCE came in as expected, rising 0.3% M/M and 2.5% Y/Y. However, core PCE increased by 0.4% M/M and 2.8% Y/Y, surpassing analyst forecasts of 0.3% and 2.7%, respectively. This aligns with Fed Chair Powell’s estimate of 2.8% Y/Y, while the prior figure was revised up to 2.7% from 2.6%. Despite core PCE being the Fed’s preferred inflation gauge, the data did not significantly shift expectations. The latest FOMC projections still see core PCE at 2.8% by year-end, implying minimal progress on inflation this year—likely due to the implementation of new US tariffs, though uncertainty remains regarding their full impact. As a result, February’s core PCE reinforced the view that the Fed is in no rush to cut rates, offering marginal support to the USD amid broader growth concerns.

Looking ahead, market attention will be on March’s Non-Farm Payrolls (NFP), February’s ISM data, and the upcoming tariff announcement. Given the unpredictable nature of trade policy, markets will likely focus more on incoming US data and Fedspeak. For the March NFP, uncertainty remains high due to government job cut efforts from the Department of Government Employment (DOGE). Some noise is expected in the report, but it is unlikely to alter the Fed’s stance on the labor market, which remains balanced and not a primary driver of inflation. With markets currently pricing in a dovish Fed stance, any upside surprises in the data—combined with neutral guidance from Fed officials—could prompt investors to reassess expectations of nearly three rate cuts this year. This, in turn, could enhance the USD’s relative rate appeal.

CAD: Will hit by big tariffs?

The outlook for the CAD remains negative as US tariff risks escalate. The April 2 tariff deadline looms large, and the risk-reward setup favors a stronger USD/CAD. The imposition of 25% tariffs on steel and aluminum on March 12 has already set the stage for a broader trade war, with President Trump signaling that both regional and reciprocal tariffs could be enforced against multiple countries, including Canada. Given Canada’s heavy reliance on US trade, these developments pose a major downside risk to the CAD.

Despite these risks, the CAD has only weakened modestly so far in response to the latest tariff announcements. Markets may be underestimating the economic impact, assuming that the tariffs will be watered down or short-lived. However, the recent pattern suggests that President Trump’s trade policies remain unpredictable, and Canada could face further tariff hikes this week. Even if Canada were to secure an exemption, prolonged trade uncertainty alone could weigh on investment and growth, amplifying downside risks for the currency.

Domestically, Canada’s economy is already showing signs of strain, and a sharper slowdown could push the BoC toward a more dovish stance. While 50bps of rate cuts are currently priced in for the BoC by year-end, this is surprisingly less than what is priced for the Fed. If trade disruptions further dampen Canada’s economic outlook, the BoC may be forced to ease policy more aggressively than expected. Short-term yield spreads are likely to widen against the CAD, which could drive USD/CAD toward the 1.5000 level as the negative economic impact materializes.

In all, with trade uncertainty escalating, no signs of a US-Canada deal, and the potential for further rate divergence, the CAD remains vulnerable. Unless there is a significant breakthrough in trade relations, the outlook for the CAD remains bearish, with further downside risks ahead.

USD/CAD 4H

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