Dollar Declines But Hours Later Part of Move Undone

The start of the Trump presidency has brought notable reactions from the markets, signaling an increase in volatility as the new US administration implements its policies. Initially, the markets responded positively when Trump chose not to impose immediate tariffs on China and Europe. This decision led to a decline in the dollar's value, but this drop was partially reversed later due to news regarding tariffs on imports from Canada and Mexico.

It seems that the administration’s approach towards its closest neighbors focuses more on domestic issues such as border protection rather than a broader trade policy. This means that initially, domestic agendas concerning security, migration, energy, and deregulation might take precedence. When it comes to trade, there is an assumption of a balanced approach, incorporating both rewards and penalties. For instance, the 75 days allotted for TikTok to secure a US partner might give both countries the chance to rethink their strategies. Similar investigations into trade relations with Europe could also be on the horizon. In this context, Europe’s increased purchase of US energy resources could serve as a preliminary strategy for negotiation as greater issues are assessed. It is expected that there will be many communication challenges during this process, leading to ongoing volatility similar to what was observed recently.

Market Reactions

The current state of the markets shows a decline in US yields, with the 2-year yield decreasing by 4.5 basis points and the 5 and 10-year yields dropping by 7.5 basis points. The Federal Reserve is currently in its blackout period, which allows more time for preparation ahead of its meeting on January 29. The 2-year US yield is testing support in the 4.20% range, and should a further correction occur, it is expected that the December low of 4.08% will provide solid backing.

The dollar's performance is rather mixed at this moment. It initially weakened when aggressive tariffs were not announced, but the news from Canada and Mexico led to a partial recovery. Furthermore, the new administration's contemplation of potential currency manipulation might limit significant increases in the dollar’s value, though it is perhaps too early for this concern to majorly impact markets in the short term. The looming threat of tariffs may set a floor for the dollar, while the yuan has notably rebounded. For the EUR/USD pair, the trend appears similar to the US 2-year yield, having tested initial support near EUR/USD 1.0428. Even if further corrections occur, breaking the early December peak of EUR/USD 1.0630 could prove challenging.

Recent Economic News

Additionally, recent data from the European Automobile Manufacturers Association (ACEA) shows that new car registrations in the EU rose by 5.1% in December year-on-year. Spain was chiefly responsible for this growth, with a striking 28.8% increase. However, larger markets such as France saw only modest growth of 1.5%, while Germany and Italy reported declines. Projections for 2024 suggest similar trends, with slight increases in new car registrations overall, but declines noted in major markets like Germany, Italy, and France.

As for the Bank of Canada, its fourth-quarter Business Outlook Survey indicated that overall business sentiment remains subdued. Nonetheless, firms are beginning to expect improvements in sales, spurred on by recent interest rate cuts and the anticipation of more to come. Plans for investment are becoming more common, although hiring remains cautious with many businesses holding extra capacity. Growth in costs is expected to continue easing, with selling prices stabilizing. However, businesses are still wary of rising input costs amid trade tensions.

Overall, consumers in Canada have shown optimism in their spending expectations for the first time since 2021, signaling a potential shift in sentiment despite looming high prices and housing costs.

Dollar, Volatility, Markets