Friday forex follies: Weekend poised as first real test of Trump's protectionist rhetoric

The European Central Bank, following its expected playbook, dialled down its policy rate by 25 basis points this Thursday. ECB President Christine Lagarde played it cool, steering clear of stirring the pot during her press conference. Yet, this announcement coincided with rather uninspiring GDP figures out of Germany and the broader eurozone. The prevailing slow growth story has cemented investor belief that the ECB's hand will be forced to implement further rate cuts even below the perceived neutral rate.

Interestingly, the EURUSD pair has managed to remain bid despite the formidable combination of domestic economic struggles and the storm of Trump's tariff threats. This resilience comes even as the transatlantic yield spread continues to widen, weaving a complex tapestry of slow growth, fiscal challenges, and geopolitical upheavals. In a striking defiance of these headwinds, the euro trades around 1.04—a puzzling standout in the often unpredictable forex landscape, particularly amidst the swirling global economic and political turbulence.

However, it's crucial to remember that in the realm of FX trading, despite the occasional short-term disruptions and market quirks, the fundamentals and interest rate differentials ultimately steer currency movements. These foundational elements are the true compass in navigating the often choppy waters of the currency markets, asserting their influence over time despite temporary deviations.

There's a significant development in today's "Funds" ( Sell USDCAD) trade call. The newly appointed U.S. border czar is slated to meet with Canada's top public safety official this Friday. This crucial discussion comes just hours before President Donald Trump's deadline to decide on imposing new tariffs on Canada, which he has threatened unless there is cooperation on curbing the flow of migrants and fentanyl across the border. This information comes from two U.S. sources who are privy to the meeting plans.

This meeting is particularly critical as it presents Canada with a last-ditch opportunity to argue its case on border security measures directly before President Trump announces his decision. The potential for diplomatic progress at this meeting has had a palpable impact on the markets, with USDCAD trading 60 points lower in anticipation of a possible favourable outcome that might avert the tariffs. The forex markets are clearly reacting to the possible implications of this high-stakes diplomacy, underscoring the tight interplay between geopolitical developments and currency valuations.

In today’s rollercoaster ride in the forex markets, the USDJPY pair gave us a spectacle, trading sub-154 at the Tokyo fix—only to rewind on a notable nudge from some familiar quarters— a hawkish pushback from Bank of Japan Governor Ueda, who said the central bank must maintain loose monetary policy to ensure underlying inflation gradually accelerates toward its 2% target.

The weekend looms as the first real test of U.S. President Donald Trump’s commitment to his protectionist rhetoric. With the 25% tariff deadline on Canada and Mexico set for tomorrow, markets are on edge.

My call for a modest long position on the Canadian dollar this morning was influenced by earlier comments from Trump’s nominee for the Commerce Department, Howard Lutnick, who suggested that these tariffs could be dodged if the countries met certain border control demands. There’s a chance we might see Trump cut last-minute deals with his North American neighbours, potentially lifting or at least postponing the tariff threats.

On the Euro front, the situation is perplexing. Despite clear indications that the European Central Bank is poised to cut rates further regardless of tariffs or not —a typically bearish signal for a currency—the Euro still finds some strength. It seems the EURUSD pair remains ensnared by the tariff debate. Should Trump follow through with tariffs on Canada and Mexico over the weekend, I anticipate the EURUSD could open around 1.03 on Monday.

It’s crunch time for our calls, and while the EURUSD might spike on a knee-jerk reaction if tariffs are not implemented, I expect traders will be queued up to sell on any rally. As for staying long on the CAD, it’s too early to call right now—this one will need to be watched closely into the New York session.

We entered our long USDCNH position at favourable levels on Monday, proving to be a solid choice with a good carry. However, we'll need to keep a close eye on weekend developments, as this pair will likely see a significant jump if the anticipated tariffs are implemented. The potential for increased volatility is high, and the USDCNH could be a key indicator of how the markets react to the new tariff measures if they come into effect.