JPY bulls awaiting satisfaction they deserve. CAD on the barbie.

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 51^st 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.