North American FX Open - Tariff talk undermines the Dollar

The Dollar has had to beat a retreat after the Washington Post reported that President-elect Trump's aides are exploring the possibility of a universal tariff plan. In that scenario, tariffs would be applied to every country, but only cover critical imports. This has brought relief to currencies like the Euro and the Loonie which have been seen as being targets for the new Trump administration. Remember last month, Trump promised last month to slap a 25 per cent tariff on all goods entering the U.S. from Canada and Mexico on January 20th.

Eur/Usd was already enjoying a minor bid tone before the Washington Post news broke, after minor upward revisions to the EZ final services and composite PMIs, as well as a large jump (to 2.7% y/y from 2% y/y) in the German state of Hesse's CPI print. So far 1.0432 has been the high, compared to last Thursday's lows down at 1.0226.

Usd/Cad has fallen all the way back to pre-Fed levels down at 1.4300. The Loonie was also in demand before the tariffs story, on speculation that Canadian PM Trudeau could announce his resignation as early as today. Newspapers in Canada are speculating that Trudeau could quit as the head of the ruling Liberal Party ahead of an emergency meeting of party members on Wednesday, "so it doesn't look like he was forced out by his own MPs."

Disillusionment has been growing within the ruling Liberal Party for a while now, with recent polling showing that their support was down to just 16%, their worst pre-election standing in more than a century. A spring election is now seen as likely, although it is unclear whether Trudeau will stay on as PM until a new Liberal leader is selected.

Usd/Jpy has been unaffected by the Dollar weakness, after the BoJ Governor Ueda stated that the central bank will raise its policy rate if economic conditions continue to improve this year, reiterating his existing stance.

The timing of rate adjustment will depend on the economy, inflation and financial conditions. Ueda hopes wages and prices will rise in a balanced manner in2025, with momentum for wage hikes a key point when considering a rate hike and uncertainties are high regarding US economic policies.

Over the weekend the Fed's Daly and Kugler both suggested that the Fed’s inflation fight isn’t over and there’s more work to be done to reach the 2% goal, with the former remarking pricing remains “uncomfortably above our target.”

In China, the Caixin services PMI expanded at the fastest pace since May, at 52.2 vs the 51.4 consensus and 51.5 result the month previous, indicating improving domestic demand following the admin's economic support package. Meanwhile, the PBOC set its Yuan reference rate at 7.1876 and considerably stronger than the psychological 7.2000 mark, suggesting China maintains its support of the Yuan and will not allow the currency to depreciate in a disorderly manner.

Today's early focus will fall on the German CPI report for December. It is a very unusual German CPI release schedule this week, with the state of Hesse having announced their update this morning, followed by the national reading later today. That is followed by the Bavaria reading tomorrow and then the rest of the states on Thursday. After the Hesse numbers and the upside misses from the Portuguese and Spanish CPI reports, the markets are braced for another faster than expected number out of Germany.

US data today is limited to the services PMI and factory orders, while we should also hear from the Fed's Cook on the economic outlook.

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