US-Canada trade war escalates, while US seek to choke the Iranian economy

The US Dollar is trading higher against nearly all currencies. Equity markets are mixed and bond yields are lower alongside oil prices. There are two major developments. First, the US and Canada trade talks broke down, and the risk is further escalation. Last week, President Trump has granted Canada a three-day grace period from the 50% tariffs on $20 bln of Canadian goods, even those that were protected by the USMCA saying a deal was struck. Canadian Prime Minister Carney was less sanguine and acknowledged that while progress was made, there were many unresolved issues. 

The second development is that US economic sanctions on Iran are intensifying.  Treasury Secretary Bessent has an editorial in today’s Financial Times and will hold a press conference later today to explain what the US economic operation will entail. There are not very thinly veiled threats against those who violate the US sanctions.  A key question is China’s response, a month before President Xi is to visit Washington and meet with President Trump.  

Prices

G10

Ahead of the weekend, and for the second consecutive session, the North American market took advantage of the euro’s push above $1.1700 in Europe to sell it.  While we recognize the US attempt to suppress long-term yields is dollar-negative, we have been cautious due to the over-extended momentum indicators. The euro has been sold to a three-day low near $1.1660 in Europe today. A break of the $1.1650 area lends supports our caution, a break of $1.1620 may be required to signal a technical correction. 

The market appears comfortable jobbing the dollar against the yen between about JPY158 and JPY159.80. There is a sense that the JPY160 level could spur an official response (verbal or material) to support the yen. The greenback rose to a three-day high of almost JPY159.30 today. It has frayed the 20-day moving average (~JPY159.20) for the first time since July 30. 

Sterling reached a six-month high ($1.3675) in Europe ahead of the weekend.  North American participants pared sterling’s rise and sent it back to new session lows (~$1.3620).  The pre-weekend low has held so far today. Additional support is near $1.36, and a break could spur an initial half-cent loss. 

The acrimonious breakdown in US-Canada trade negotiations and the mutual recriminations dragged the Canadian dollar lower today and it has reached its best level in three months ahead of the weekend. The greenback is rebounding from almost CAD1.3730 at lowest level before the weekend to almost CAD1.3845 and the 200-day moving average.  Last week’s high was slightly above CAD1.3900. While the intraday momentum indicators are stretched, the daily indicators have just begun turning.  The US has threatened to retaliate, and the risk is for more escalation.  Canada is the only other country besides China that has retaliated against the US tariffs. If Canada succeeds, others might be emboldened.   

The Australian dollar reached almost $0.7180 in the North American session ahead of the weekend. It settled above the upper Bollinger Band (~$0.7170 today).  The $0.7200 area offers stronger resistance, especially given the stretched momentum indicators. It is trading quietly today in a narrow range of almost 20 ticks in the upper end of last Friday’s range. A break of $0.7135 would suggest the consolidative/corrective phase may be at hand. 

EM

The Mexican peso finished last week at its best level since mid-2024.  The dollar hovered near MXN16.91.  The dollar made a marginal new low today near MXN16.8875 but is near MXN16.93 in late European morning turnover, and the risk-off mood makes in vulnerable in the North American session. Previous support around MXN17.00, now functions as resistance.

The offshore Chinese yuan appreciated by about 0.35% against the dollar last week, its biggest weekly advance in two months.  The US dollar was sold to a new low today, slightly below CNH6.7130 but has recovered and is now probing near last Friday’s high (~CNH6.7255). We had thought that Beijing might be inclined to signal consolidation as the Trump-Xi meeting draws close, but as ironic as it might sound, the market appears to have forced its hand a bit. Still, the PBOC set the dollar’s reference rate higher for the second consecutive session.  Today’s fix was at CNY6.7841 and CNY6.7817 end the end of last week. Last week’s low, on Thursday was CNY7.7808, was the lowest since February 2023. 

The Indian rupee traded softer today but remained with the range seen in the second half of last week. Last week’s dollar high was near INR95.7635 and today it was capped at INR95.75, where it settled. 

Other markets

Equities are mixed today. but mostly lower. The S&P 500 gapped lower last Thursday and was not able to close it before the weekend. Despite the better performance on Friday, a small upside gap remains, which extends to a little above 7700. The Nasdaq Composite gapped lower last Tuesday and Wednesday attempt to close it failed.  Support was found in the last two sessions, near 26000. The gap from earlier this month extends to about 25967. Nasdaq futures are off around 0.5% and the S&P futures are off around 0.15%. Asia Pacific bourses were mostly lower today, with China’s CSI 300, the Hang Seng, and the Taiex fell more than 1% and the Kospi was tagged for a little more than 3%.  Australia was a notable exception and rose almost 0.50%. Europe’s Stoxx 600 is hovering around little changed level after the pre-weekend gain of almost 0.6% snapped a seven-day slide.  

Despite Treasury Secretary Bessent’s claims that he knows better than the market and attempts to cap yields, the US 10-year note yield rose to slightly above 4.74% ahead of the weekend, less than a half of basis point from the year’s high. It rose by around 4.5 bp last week. The 30-year bond yield rose almost two basis points to settle near 5.28%. The multiyear high was recorded last Tuesday, slightly above 5.33%.  Yields are lower today.  European benchmark rates are 1-2 bp lower and the 10-year US yield is off almost three basis points. 

Gold advanced $110 an ounce before the weekend, its second advance last week of more than 2% to settled about 5.7% higher on the week. It reached $4632, its best level in three months. Gold’s gains have been extended to almost $4660 today. The $4769 area corresponds to the halfway mark of decline from the record high in late January (~$5595.50) and is where the market stalled in May. For its part, silver traded above $70 before the weekend, for the first time since mid-June’s FOMC meeting.  It is trading quietly in the upper end of last Friday’s range. A move above $70.50 could spur a test on the 200-day moving average (~$72.25), which gold has settled above for the past three sessions.

October WTI consolidated ahead of the weekend in a roughly $85.80-$87.50 range.  The US economic stranglehold that is threatened is bound to trigger a disruptive reaction by Tehran.  Toppling the regime may prove to be a different kettle of fish.  US Treasury Secretary Bessent ahs an editorial in the Financial Times urging others to join the US sanctions against Iran with a threat of secondary sanctions.  He is expected to hold a press conference at 2:00 pm ET today to discuss the economic chokehold on Iran. October WTI has rallied about 12% in the last two weeks and entered today with a six-day rally in tow.  It is off about 2.25% today. 

Data

What is a busy week of US economic data begins slowly with only the July Chicago Fed’s National Activity on tap today. It typically does not elicit a response from the market.  We note that it contracted on average by -0.17% in Q1 and by -0.05 in Q2. We know that the economy grew by 2.1% in Q1 and 1.5% in Q2 (at annualized rates). 

Mexico has a busy day.  It offers another look at Q2 GDP, which was initially estimated at 1.5% quarter-over-quarter. It followed a 0.6% contraction in Q1. The estimate for Q2 GDP is the strongest since end of 2020.  With Q2 in hand, it renders the June IGAE Economic Activity report superfluous, which serves as a monthly GDP estimate. Inflation for the first half of August will also be reported. The headline rate has fallen from about 4.6% in mid-March to 3.10% in mid-July.  It rose in late July for the first time since mid-March and may have edged up in the first part of August (3.2% median forecast in Bloomberg’s survey). The core rate has been stickier. It had been above the 2-4% target range from late May 2025 until the second half of June 2026.  It steadied slightly below 4% in the second half of June.