By eFXdata — Feb 04 - 09:15 AM
Synopsis:
Trade policy uncertainty is very high, with tariffs used as a negotiating tool. Until a new USMCA deal is finalized, tariff risks will persist.
Key Points:
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Markets Should Expect More Volatility & Uncertainty:
- Nothing is final until officially settled.
- US policy threats must be taken literally—the administration’s transactional approach increases risk.
- The US policy "put" is not as market-sensitive as investors expect—tariff-driven equity weakness may not be quickly reversed.
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Market Implications:
- US Rates: Add duration if rate rises fully price out cuts or price in hikes.
- CAD Rates: Tariffs could force BoC cuts below 2%, leading to a CAD front-end rate rally.
- USD: Near-term strength but softening in H2 2025.
- CAD: Fade USDCAD volatility vs. a broader CAD move.
- US Equities: Stock-picking over index exposure—tariffs could drive an 8% drop in earnings if firms can’t pass costs to consumers.
Conclusion:
Markets should brace for continued tariff-driven volatility, particularly in FX and equities. The USD remains strong in the short term, but longer-term headwinds may emerge in H2 2025 as trade and policy risks evolve. BoC easing and CAD weakness are likely, while US equity exposure should be more selective due to potential earnings risks.
Source:
BofA Global Research