Dollar’s struggles continue as tariffs remain in focus

Risk sentiment improves

It is a rather steady start to the trading week, as market participants are mostly preparing for what lies ahead. Risk appetite appears to be on the mend though, with US equity indices experiencing a rather positive performance last week and the US dollar erasing its early-week losses. The Nasdaq led the rally on the back of commentary, and partly wishful thinking, that the US-China trade war might gradually de-escalate, with technology products being the first beneficiaries of a lower tariff regime.

The path, of course, towards a US-China agreement will not be straightforward, despite some positive commentary from both sides, mostly from US Treasury Secretary Bessent. Both governments are unwilling to make the first significant step and open the door to proper negotiations, as such a move might be seen as a sign of weakness, a perception President Trump is unlikely to accept.

US administration craves trade agreements 

Further developments are expected on this front this week, as US officials continue trade discussions with America’s key partners. The US administration is desperate for trade agreements, and it is almost certain that any such progress will be extensively advertised by Trump, claiming that the US is finally leveling the playing field and achieving better trade terms because of his tariff strategy.

Meanwhile, China is preparing for a lengthy trade war, following the old dogma that ‘if you desire peace, prepare for war’. Further economic measures have been announced overnight about growth and employment, with monetary policy also expected to do its part, with the PBOC deputy governor stating that an RRR cut would come when most needed.

The latter might not be taken lightly by Trump, who, despite the recent less aggressive tone towards Fed Chair Powell, wants lower rates to support the US economy. Markets are currently expecting 87bps of easing in 2025, but the first cut is not fully priced in until the July 30 meeting, more than three months away.

Fed’s focus remains on incoming data

US data could overshadow developments on the other fronts, as the calendar includes the usual early-month releases, predominantly Friday’s labour market statistics, and the initial print of the first quarter GDP change. Investors might also be on the lookout for any Fedspeak, but there will not be any commentary, as the official blackout period is already in place ahead of the May 7 meeting.

Crucial Canadian election

The rather quiet calendar today has shifted the focus to Canada, where voters will elect a new federal government. With the economy feeling the heat from Trump’s tariff strategy - the S&P Global Manufacturing PMI has quickly retreated further into contraction territory, and both the headline and core inflation rates are edging higher - the importance of this election process cannot be understated.

The Liberals are expected to achieve one of the largest surprises in electoral history globally, as just five months ago the party was expected to be decimated at the election. However, courtesy of Trump’s aggressive stance and the Conservative Party’s failure to meaningfully stand up to the US president, Carney is preparing to become the next elected PM.

The most likely outcome is a Liberal majority win, which might not be taken lightly by loonie traders in view of a potential ‘war’ with the US President. On the flip side, a Liberal minority win and particularly a surprise Conservative Party victory would prove more market-moving and most likely benefit the loonie against the US dollar.