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JPY bulls awaiting satisfaction they deserve. CAD on the barbie.
Summary: Beneath the tariff noise, US-Japan bond yield spreads suggest USDJPY should be trading far lower. Elsewhere, big political stakes for CAD as the Trump effect has suddenly revived the Liberal party’s political fortunes ahead of a Canadian election.
EUR eases back on fresh Trump tariff threats
Breaking: Just before going to screen time, Trump was out underlining that the Canada and Mexico tariffs will go into effect on Mar 4 (clearing up uncertainty from prior day, and of course unless some last minute negotiations clear the way….). He also said that an additional 10% on China would be assessed on March 5 and said reciprocal tariffs remain on track for April 2.
At US President Trump’s first official cabinet meeting yesterday, he claimed that “the EU was formed in order to screw the US”, saying that the bloc was “a different kind of case” from Canada and Mexico. He suggested he would impose 25% tariffs on the EU by April 2, which pushed the euro lower versus the US dollar and sterling overnight, if modestly so. Confusion reigned yesterday as the March 4 deadline for the US tariffs against Canada and Mexico is in doubt after Trump repeated the April 2 for those two countries as well, whereupon Commerce Secretary Lutnick cut in to say that they would be granted a delay only if they delivered on measures against illegal fentanyl trafficking.
In general, the reactions to tariff threats have been fading on the assumptions that they are a negotiation tactic to extract policy moves (Note: market taking today’s latest threats a bit more seriously). On the EU tariff threats threatened for April 2, the timing is interesting, as this would come just days after a decision is due from the EU competition chief Teresa Ribera on antitrust investigations against Apple and Meta on their possible violations of the EU’s Digital Markets Act, which could result in enormous fines. The market is underestimating the risk perhaps of an EU-US trade tiff and the internal division within Europe this could trigger longer term – more to come on that subject.
Also note the risks for Canada and CAD if the Liberal party feels it has domestic political hay to make by putting up a fight against the Trump administration.
Risks to CAD on Liberal Party resurgence?
CAD is lower and now well back into the upper range from late December to earlier this month above 1.4270. The political landscape in Canada has undergone a seismic shift since Trump threatened tariffs against the country and has called for Canada to become the 51st US state. The polls now have the Liberals, which were at historic lows at the moment Trudeau resigned, now polling even with the Conservatives, a head-spinning reversal from just a few months ago when it was 45% for The Conservatives versus 20% for the Liberals – it is now about 35-35%. While both sides domestically acknowledge the need to accelerate military spending in recognition of Trump’s posturing, rhetoric from contender for Liberal party leadership Mark Carney that the Canada should not only seek to raise spending, but to ensure as little of it goes to the US and instead goes to Asian and European supplies is remarkably tone-deaf. Canada finds itself in a new era of the New Monroe Doctrine – it can choose to put the best spin on what is going on, but its priorities must match the new US priorities or it will suffer extreme pressure from the Trump administration, which can practically shut down the Canadian economy at will. Make huge strides on all things fentanyl and ramping of defense spending (mostly US-derived, but sure, go ahead and invest in this area domestically, too), far above the piddling amounts that have been aired, like 2.5% of GDP by 2027. Or else! Mexico knows the drill.
Chart: USDJPY
The US-Japan 10-year yield spread has dropped to 290 basis points over the last two day, down from a local high of 358 basis points on January 13, when USDJPY traded above 157.00. The last time US-Japan 10yr spreads traded below 290 basis points in much of the period between mid-August and early October of last year, USDJPY traded south of 145 for most of this period. Is the currency pair mis-priced or is the market discounting the JPY due to the overhanging US tariff threat and the BoJ weighing in on intervention in the bond market if Japanese yields march higher than they like? Hard to know here, but nothing is broken for in the USDJPY downtrend in the near term if the price action steers clear of closing above the important 150-151.00 zone. A move below 148.65 would reinvigorate the focus on the 140.00 area, which might require that risk sentiment is both rolling over (more on that below) and the US 10-year benchmark continues lower toward the 4.00% mark.
Still watching risk sentiment – tough sledding for JPY bulls if animal spirits continue thriving?
We now have one of the key quarterly event risks out of the way – the Nvidia earnings that were reported last night, with the company beating on expectations and providing a strong forecast, but not so overwhelmingly strong to trigger a significant reaction. The technical situation in the Nasdaq 100 index is critical – very near a major support level around 21,000 on the future. We will get a signal one way or the other on risk sentiment in coming days. While tariff and US growth concerns weigh, it is certainly supportive for risk sentiment to see US yields retreating aggressively, with the 10-year benchmark even touching below 4.25% at one point yesterday.
One data point of note – the weekly AAII Investor survey, a survey of individual investors with a history stretching back decades, is showing one of its most bearish readings ever – at a time when stocks have suffered an extremely shallow correction from all time highs. It has never been a survey that can be used as a timing tool, but this very bearish reading is unprecedented, given that normally, extremely bullish readings coincide with strongly surging markets and clusters of bearish readings coincide with ugly sell-offs. Is there any information value here, or are market participants simply bearish because the bull market has stumbled into mostly sideways mode for about four months now or are simply feeling unsettled by the highly unusual and charged geopolitical backdrop? For forex traders, the JPY bull case is a bigger challenge when risk sentiment is positive, as traders ignore or at least pay less attention to the JPY-supportive development in global yield spreads.
NEW FX Board of G10 and CNH trend evolution and strength.
Note: Rather than provide the usual note – I have created a video tutorial for understanding and using the FX Board.
While the USD trend reading remains negative, the overall USD trending status is somewhat uncertain here: EURUSD hasn’t been able to make a break higher, AUDUSD is struggling back below the key 0.6330 upside break, and USDCAD has returned to the higher range while USDJPY has yet to take out that critical 148.65 support, etc. Stay tuned there. Elsewhere, note the weak CAD reading and note the gold bull trend slowing as it struggles near a local support level versus the US dollar.
Table: FX Board Trend Scoreboard for individual pairs.
EURCAD flipped to a positive trend on the weak CAD, although the pair is stuck in a range stretching back to early 2023 – watch 1.5200 there. Elsewhere, USDCAD, AUDUSD and NZDUSD are all on tilt for a flip to USD-positive trend status (or initially, a neutralization of the USD bear trend in those pairs)