Foreign Exchange Commentary

Summary

• On Monday the tariffs announced by President Trump went into effect. Imposing a 25% duty to products imported from Mexico and Canada and 20% for products imported form China
• On Thursday tariffs were pushed back until April - goods covered under the USMCA will have their tariffs delayed until April 2^nd
• Non-farm payrolls came slightly below forecast at 151k. The market forecast was 160k
• There was a strong euro rally this week on the back increased German fiscal spending – Germany is proposing changes in its fiscal rules to allow for additional spending in defense and infrastructure
• We continue to see a JPY rally as the Bank of Japan continues to unwind decades of negative rates

U.S. Trade Disputes with Canada and Mexico
On Monday morning President Donald Trump followed through with the implementation of tariffs announced during his inauguration, it also added an additional 10% tariff on China bringing the levy on Chinese imports to 20%.

On the impending 25% Tariffs to Canada and Mexico he remarked there was “no room for negotiations.” In response, the Mexican peso weakened to 20.75, while the Canadian Dollar weakened to nearly 1.4550. However, US Commerce secretary Howard Lutnick announced on Wednesday that there was potential “to meet in the middle”.

USMCA Exemptions
After conversation between President Trump and the Mexican and Canadian administrations on Thursday and facing backlash from the agricultural and automobile industries; President Trump temporarily exempted all goods covered by the USCMA from his 25% tariffs, until April 2^nd. In response to the announcement, both the Canadian dollar and the Mexican peso retraced, but they continue to be at levels not seen since the COVID-19 pandemic.

Non-Farm Payrolls
On Friday the U.S Bureau of Labor Statistics release its employment report. In February the US economy added 151k jobs, which was lower than the market forecast of 160k. Federal jobs declined by 10k, reflecting some of the DOGE layoffs.

The Euro and European Central Bank (ECB)
This week the Euro rallied over 3% against the dollar achieving its best 4-day performance since 2015, peaking around 1.0885. This appreciation was mainly supported by improved sentiment for European assets and a shift in the ECB’s interest rate outlook.

ECB officials lowered the central bank’s three key interest rates by 25bps and updated its monetary policy stance, acknowledging that monetary policy is becoming “meaningfully less restrictive” hinting that we may not see additional rate cuts in 2025.  

The European Commitment to Defense
This week incoming German Chancellor Frederick Merz articulated that he is trying to form a coalition with the center-left Social Democrats and will propose an exemption to Germany’s current fiscal rules to increase defense spending by more than 1% of GDP. This came after last week’s impasse between President Trump and President Zelensky, which prompted a response from European allies to support Ukraine in its war against Russia.

Mr. Merz called for Europe’s self-reliance in terms of defense capabilities and proposed a 500-billion-euro defense and infrastructure fund equivalent to 12% of Germany’s GDP, sparking a massive rally in the Euro and European equities.  

After years of EU officials asking for higher German fiscal spending, Eurozone leadership finally agreed to more expansionary fiscal policy. The announcements also prompted German bunds to record its worst rout since the fall of the Berlin Wall in 1990. The German 10-year bunds are currently yielding 2.85%

The Japanese Yen
The Yen continues to strengthen against the US Dollar. After trading as high as 158 in early January, the Yen has strengthened nearly 10% against the U.S dollar and continues to inspire investor confidence as the Bank of Japan unwinds decades of negative rates. With the most recent rate hike in January, there is little chance of an additional hike this month - the market is currently pricing at least one more hike this year.