We remain wary of upside risks in the USD. US President Donald Trump reminded markets that the 30-day suspension of the proposed 25% tariffs on imports from Canada and Mexico was set to conclude next week. Also likely to take effect is the 25% tariff on steel and aluminium on March 12 and the 25% tariff on automobiles, semiconductors, and pharmaceuticals on April 2. Barring another delay in tariffs, markets should be short-covering after underpricing the risks of Trump’s hawkish trade policies. The DXY Index, which ended 0.3% higher to 106.60 overnight, is some ways below 110 or the level seen on February 3, the original date for the tariffs on Canada and Mexico.
USD/CAD rose a second day by 0.3% to 1.4260; the currency pair has been struggling around the 1.42 level after hitting the year’s low of 1.4151 on February 14. Over the weekend, Bank of Canada Governor Tiff Macklem warned that a US-Canada trade war could lower long-term economic growth by 2.5% through exports, consumption, and investment. With GDP growth below 2% YoY since 2Q23, US tariffs could tip the Canadian economy into recession. With the BOC suspecting that underlying inflation may be lower than indicated by the price gauges, markets may be underestimating the willingness of the BOC to keep lowering rates. The OIS market has priced in two additional 25 bps cuts this year, in April and July. All said, we remind readers that USD/CAD, after hovering for a month around 1.44, surged to 1.48 on February 3, the original date that Trump’s tariffs were supposed to take effect.
The EUR’s post-German election relief rally was short-lived. EUR/USD failed to overcome the psychological 1.05 level for the third time this year. CDU/CSU won 28.5% of the vote share at the German elections on February 23, with its leader, Friedrich Merz, set to become the new German Chancellor. Merz is targeting to form a government by Easter (April 20) but his choices are limited to the unpopular Social Democrats or the Greens, parties with significant policy differences with the CDU/CSU. The far-right Alternative for Germany (AfD) will be a formidable opposition after capturing 20.8% of the votes, its highest ever, and a third of the seats in the Bundestag. EUR/USD traded briefly below 1.02 on February 3.
USD/SGD rebounded to 1.3390 after hitting the year’s low of 1.3312 yesterday. Apart from the USD’s strength, the SGD was weighed by significantly lower-than-expected inflation, which validated the central bank’s decision to slightly reduce the slope of the SGD NEER policy band on January 24. CPI inflation fell to 1.2% YoY in January, below the official average forecast range of 1.5-2.5% for 2025. Likewise, the MAS core inflation declined to 0.8% YoY, also beneath this year’s 1-2% forecast range. The Ministry of Trade and Industry expects GDP growth to slow to 1-3% in 2025 after posting an impressive 4.4% growth in 2024. According to our model, the SGD NEER was 0.5% above the mid-point of its policy band, which is consistent with the official expectation for slower GDP growth and benign inflation this year. USD/SGD hit 1.37 on February 3.
Quote of the Day
“I am a tariff man, standing on a tariff platform.”
William McKinley
February 25 in history
Australia’s first currency, the holey dollar, was introduced in 1814. 
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