The Morning Update

The USD weakens, oil prices rally, equity markets are down, and US yields rise as steel tariffs and China tensions impact sentiment. The USD weakened against its G20 peers as investors considered the effects of the US's changing tariff policy and its potential influence on global growth and inflation. Global equities declined as escalating global trade tensions and geopolitical uncertainty weakened risk-on appetite. Risk sentiment diminished following accusations from China and the US against one another for breaching a trade agreement finalized last month in Switzerland. On Friday, President Trump announced his plan to double tariffs on steel and aluminum to 50% on Wednesday. At the same time, Ukraine launched a dramatic series of strikes across Russia, using drones concealed in trucks to target strategic airfields. Goldman Sachs stated that it anticipated the 10% tariff floor for major trading partners to persist, along with sectoral tariffs. "The risk remains that if tariffs are impeded, attention may shift to other ways of raising revenues, which may be even more negative for the dollar," Goldman analysts said in a note. Elsewhere, oil prices rallied after OPEC+ kept output increases unchanged, Bitcoin eased to $104.6k, while gold prices strengthened on safe-haven buying. This week focuses on Monday's US ISM Manufacturing PMI and Fed Chair Powell's speech. Tuesday, the EU Harmonized Index of Consumer Prices. Wednesday, US ADP Employment Change, BoC Interest Rate Decision. US ISM Services PMI. Thursday, ECB Monetary Policy  Statement, ECB Press Conference, and CAD Ivey PMI. Friday, ECB President Lagarde's Speech, EU GDP, CAD Unemployment Change, US Average Hourly Earnings, and the US Nonfarm Payrolls report will help provide direction to currency markets.

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In other news. China counters Trump's accusations of Geneva trade deal violations and says the US is undermining consensus. Nationalist candidate Nawrocki wins the Polish presidential election. Ukraine stages audacious attack on airfields deep in Russian territory. Aggressive reshoring of supply chains risks significant GDP loss, warns the OECD. Northern US Mayors call for end to 'irrational' trade war with Canada. PM Carney picks Canadian Pension executive as next chief of staff. We are moving to war-fighting readiness, says UK PM Starmer as he unveils defence spending plans. At least seven people are dead after two Russian bridges collapsed. Treasury Secretary Bessent insists the US will 'never default' on its debt.

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In currency markets. The USD index initially dropped 0.8%, giving back nearly all of last week's gains after China's Commerce Ministry said on Monday that the US's charges were groundless, and promised to take unspecified forceful measures to safeguard its interests. CNY is flat, while Asian currencies gained by 0.3% on average against the USD. Trading currencies advanced a weakening USD, with CHF, PLN & ZAR up 0.4%, SEK, JPY, CZK, MXN & DKK firmed 0.6%, and AUD, NOK & NZD rallied by 0.9% against the USD.

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In commodity markets. Oil prices strengthened by 3.7%. Natural Gas & Copper prices rallied by 4.6%. Gold prices gained by 1.7%. Silver prices firmed by 1.3%. Wheat prices are up 0.7%, while Soybean prices fell by 0.7%.

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CAD approaches eight-month highs, ignoring the looming threat of US steel and aluminum tariffs escalating to 50% on Wednesday, as investors focused on the weakening USD, BoC holding rates, and the rallying commodity prices. Investors will be focused on several key Canadian economic releases this week, starting with Wednesday's BoC interest rate decision, followed by Thursday's Ivey PMI report and Friday's unemployment report. CIBC Chief Economist Shenfeld is calling for the BoC to keep rates on hold, saying "no one interest rate decision in isolation would ever be a fatal error one way or another, but I think the clock will start to tick louder on getting some interest rate relief if the economy remains." Intraday, updates on tariffs, the US ISM Manufacturing, CAD S&P Global Manufacturing PMI, and Fed Chair Powell's comments will help provide direction to the loonie today.

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EURCAD advances, as the loonie underperforms against its peers, with the prospect of a 50% increase in tariffs on aluminum and steel having a more significant impact on Canada.

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EUR advances through 1.1400 on renewed USD weakness. The euro rises to multi-week highs amid widespread USD selling pressure as investors become increasingly concerned about escalating US-China trade tensions. President Trump accused China of violating its trade agreement on Friday, while China responded by saying that the US had breached the 90-day trade truce by introducing a series of " discriminatory and restrictive measures against China." Expect markets to remain cautious as the Trump tax bill moves to the Senate, the ECB interest rate decision on Thursday, and the ECB's message on the economy in Q3.

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GBPEUR holds steady in early trading as both currencies advance amid the increasing US/China trade tensions.

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GBP advances towards 1.3550 as focus shifts to the US PMI report. The pound keeps pace with its peers, strengthening against the USD amid increasing Sino-US trade tensions. With the absence of key UK economic data releases this week, we expect investors to continue to focus on US data releases and updates on the China/US trade tensions to drive direction for the pound.