Source:coindesk

Canadian Highlights

The inaugural week of Trump’s presidency reminded markets how quickly sentiment can shift. The looming threat of tariffs could raise costs for businesses and consumers on both sides of the border.

For now, inflation is easing. December inflation data moved closer to the Bank of Canada’s target, with consumer inflation expectations anchoring around historical norms.

Retail sales were weak in November, but December’s rebound in the flash estimate suggest stronger year-end activity, supporting a more gradual 25-basis-point cut next week.

U.S. Highlights

President Donald Trump was sworn in as 47th President on Monday and wasted no time signing a barrage of executive orders.

While President Trump did not impose any tariffs in Week 1, he threatened Canada and Mexico with a 25% tariff (and later China with a 10% tariff) as early as February 1st.

But without any immediate action, financial markets breathed a sigh of relief, though this could be short lived as the February 1st deadline quickly approaches.

Canada – Tariff Threat Looms Just as Economy Shows Improvement

If the inaugural week is anything to go by, the next four years of Trump’s presidency promise to be a roller coaster for Canada. Volatility in the Canadian dollar underscores how quickly sentiment can shift: reports of delayed tariffs early Monday lifted the Loonie by more over 1%, only for it to erase those gains later in the day, when Trump announced plans for tariffs as high as 25% on Mexico and Canada by February 1st. At the time of writing, the exchange rate has stabilized around $0.698 per CAD, about a percent lower than last week.

As history shows tariffs beget tariffs. The Canadian government warned that if imposed, these tariffs will trigger retaliatory measures on up to C$150 billion worth of U.S. goods. Our report this week sets the record straight: Canada is America’s largest export market, with nearly US$350 billion goods and services crossing Canada’s border over the first three quarters of 2024. The negative impact of tariffs would ripple through business supply chains, raising costs and creating inflationary pressures at the retail level – far from the economic relief Trump promised during his campaign.

A full-blown trade war remains an outlier scenario, but even targeted tariffs could undermine consumer demand on both sides of the border. The Bank of Canada’s recent Business Outlook Survey, sheds light on how firms perceived these risks in the fourth quarter of last year. Conducted after the presidential election but before Trump’s 25% tariff threat on Canada and Mexico in late November, businesses reported concerns over potentially higher input costs due to trade tensions. These costs, if realized, are likely to be passed on to consumers to some extent.

This disruption comes just as the Canadian economy shows signs of recovery. December’s inflation data moved closer to the Bank of Canada’s 2% target (Chart 1). While some price categories were temporarily affected by GST tax break, others, like shelter inflation, have seen relief from lower rates. In addition, consumer inflation expectations – as measured by the Canadian Survey of Consumer Expectations – are settling around historical norms, reinforcing confidence in the Bank’s ability to instill price stability.

Consumer demand, though soft, continues to recover. November’s retail sales data showed core retail sales (excluding autos and gas) declined by a sizeable 1.0%, but the three-month trend in real core retail sales per capita continued to recover (Chart 2). Spending at restaurants also saw robust gains in November, suggesting consumers are increasing outlays on discretionary areas. Furthermore, the strong flash estimate for December is encouraging, as the GST tax break would weigh on nominal spending tallies as they include GST receipts. On balance, this week’s data suggests that the Bank of Canada still needs to continue easing its key rate but proceed more cautiously, with a 25-basispoint cut next week. Markets will also scrutinize the accompanying Monetary Policy Report for insights into how the Bank is incorporating trade risks to its outlook.

U.S. – A Wild First Week

President Trump started his second term in office with a blitz of executive orders targeted at overhauling border and energy policies, pulling out of the global tax deal, unwinding signature Biden administration policies, and imposing a temporary freeze on federal hiring. But perhaps the most surprising development of the week was what didn’t materialize – an executive order to impose universal tariffs on major trading partners.

However, President Trump did put Canada and Mexico (and later China) on notice, threatening each with a 25% tariff (10% on China) as early as February 1st, citing increased illegal immigration and drug flows as the primary motive. In addition, the President directed federal agencies to investigate “unfair and unbalanced” trade practices with the U.S. and has set a deadline of April 1st for specific policy recommendations. For now, President Trump has said “he isn’t ready to move ahead with universal tariffs on goods from around the world”, but his actions this week suggest that the tariff threats shouldn’t be taken lightly.

Financial markets appeared to breath a sigh of relief, with the S&P 500 ending the week 2% higher. However, longer-term Treasury yields were little changed on the week, with the 10-year Treasury yield at 4.65% at the time of writing. Fed funds futures also remained largely unchanged, with 40 bps of cuts priced in by year-end.

Should President Trump follow through on his tariff threats to Canada and Mexico, he would likely have to invoke the International Emergency Economic Powers Act due to both the tight timeline and the fact that he’s tying the tariffs to non-trade related issues. But we view this scenario as unlikely and see the tariff threats as a way of applying pressure to extract concessions. This would include tighter border security from its neighbors and perhaps and early reopening of the North American Trade deal ahead of the scheduled 2026 joint review.

While a full blown North American trade war would benefit no one, it’s clear that the northern and southern neighbors would feel the brunt of the impact. Measured as a share of GDP, exports from Canada and Mexico to the U.S. account for roughly 19% and 26% of their economies. However, combined U.S. exports to these two countries account for little more than 2% of its GDP (Chart 1). But beyond the hit to growth, there’s also the inflation impact to consider. Nearly 60% of the oil & gas imported into the U.S. comes from Canada. Should the U.S. impose a 25% tariff on these imports, or Canada restrict its oil exports as a retaliatory measure, then that alone would have an immediate price impact on U.S. consumers. Beyond the energy dependencies, the North American auto supply chain is also heavily intertwined. Disentangling the production process would be a costly endeavor.

Recent surveys of consumer confidence have already shown a growing unease on the future economic outlook and a jump in inflation expectations (Chart 2). Heighten inflation played a huge role in getting President Trump reelected, and it’ll likely serve as a governor on how far the Republicans are willing to push on tariffs.

Source: ACTIONFOREX

In the outgoing week, Bitcoin updated an all-time high, approaching a price of $110K and dragging the entire crypto market up with it. On Friday morning, capitalisation is moving up again, settling above $3.63 trillion. The market needs time to adjust to the current highs, and so far, there are more signs that this is a pause before further growth rather than the market hitting impenetrable resistance.

That said, the sentiment index has been cruising in the greed zone, only going to extreme greed once. As was the case in mid-December, high sentiment index values intensified the selling.

Bitcoin fell below $100K during the week, then approached $110K before gently re-emerging at 102K. The selling intensified on the approach to the peak of $110K in December and in January.

However, support has also shifted above $100K, meaning market participants are now getting used to a six-figure price. Additionally, the market continues to bounce around mentions of Bitcoin and cryptocurrency reserves by Washington officials, which adds volatility but doesn’t help with direction.

News Background

If investors of all categories, from private to institutional, decide to allocate between 2% and 5% of their portfolios to the first cryptocurrency, its value could reach the $700,000 mark, BlackRock CEO Larry Fink said.

Goldman Sachs CEO David Solomon commented that Bitcoin does not threaten the dollar’s status as a reserve currency, remaining a speculative asset. From a regulatory perspective, he said, the bank still cannot own and transact in the first cryptocurrency.

Trading in XRP and SOL futures on the CME could begin on 10 February if approved by regulators. Such information appeared on a subdomain of the CME Group platform. A spokesperson for the exchange said that the beta version of the website was in the public domain ‘by mistake,’ and no decision has yet been made to launch the contracts.

Investment firm Bitwise has filed an application to register the Dogecoin-based ETF (DOGE) with the Delaware (US) Department of State’s Division of Corporations. Decrypt notes that asset managers typically register legal entities with the state before filing formal applications with the SEC.

Member of the US House of Representatives Gerald Connolly called for an investigation into possible conflicts of interest in connection with cryptocurrency projects of Donald Trump. In his opinion, it potentially violates ethical norms and creates risks to national security.

Source: ACTIONFOREX

Source：asia fund managers

The BoJ also forecast underlying inflation to remain at or above its 2% inflation target over the medium term, in our opinion a strong signal of further tightening to come. Comments from Governor Ueda also leaned hawkish, as he said the current policy rate is still far from its “neutral” level, and that he was not considering some specific rate level as a barrier.

Against this backdrop, we continue to forecast a 25 bps rate hike to 0.75% at the BoJ’s April announcement. We now also forecast a final 25 bps rate increase to 1.00% in July, while acknowledging that the timing of that final rate hike could get pushed back depending on how local and global economic conditions evolve. Overall, we think the outlook for Bank of Japan tightening and eventual Fed easing could lead to a reasonably resilient yen through 2025, with more sustained and substantial yen weakness perhaps more likely in 2026 as the U.S. economy recovers.

Bank Of Japan Takes A Further Step Along Its Monetary Policy Normalization Path

In a widely expected decision, the Bank of Japan (BoJ) took another step along its monetary policy normalization path at this week’s meeting, raising its policy rate by 25 bps to 0.50%. In raising interest rates, the BoJ said growth and inflation have been developing generally in line with its forecasts, and also cited reasons for a firming in wage and price trends. The BoJ said:

There have been many views expressed by firms stating that they will continue to raise wages steadily in this year’s annual spring labor-management wage negotiations; and

With wages continuing to rise, there has been an increase in moves to reflect higher costs, such as increased personnel expenses and distribution costs, in selling prices.

The Bank of Japan also noted relative stability in global financial markets, saying “while attention has been drawn to various uncertainties, global financial and capital markets have been stable on the whole, as overseas economies have followed a moderate growth path.”

The Bank of Japan’s encouraging assessment of recent economic trends was also reinforced by upward revisions to its economic outlook. While the forecasts for GDP growth were little changed, there were some notable upward revisions to the central bank’s inflation forecasts. CPI ex-fresh food inflation is forecast at 2.7% for FY2024 (previously 2.5%), 2.4% for FY2025 (previously 1.9%) and 2.0% for FY2026 (previously 1.9%). In a similar vein, the outlook for CPI ex-fresh food and energy inflation was revised higher to 2.2% for FY 2024 (previously 2.0%), 2.1% for FY2025 (previously 1.9%) and 2.1% for FY2026 (unchanged). The forecast for Japan’s underlying inflation to remain at or above the central bank’s 2% inflation target over the medium term is, in our opinion, a strong signal of further tightening to come. The Bank of Japan indicated as much in its monetary policy announcement, saying that:

Given that real interest rates are at significantly low levels, if the outlook for economic activity and prices presented in the January Outlook Report will be realized, the Bank will accordingly continue to raise the policy interest rate and adjust the degree of monetary accommodation.

Hawkish Comments Hint at a Higher Terminal Policy Rate

In addition to the Bank of Japan’s announcement, in our view, comments from Governor Ueda also point to multiple further rate hikes from the Bank of Japan over the balance of 2025. Ueda said he expected solid results from this year’s spring wage negotiations, a development we think would be supportive of another rate increase in April. Ueda also suggested global markets have been relatively calm in the initial days of President Trump’s administration. Interestingly, Ueda also said that even after this week’s rate increase, the current policy rate is still far from its “neutral” level, and that he was not considering some specific rate level as a barrier. He indicated that one BoJ analysis suggested the neutral rate could be somewhere between 1.00% and 2.50%. So long as overall economic trends remain encouraging, we view those comments as consistent with the BoJ eventually raising its policy rate to 1.00%, perhaps by its July announcement.

Regarding recent economic trends, labor cash earnings rose 3.0% year-over-year in November and expectations for this year’s spring wage talks are upbeat. Inflation also remains elevated, with CPI ex-fresh food inflation at 3.0% year-over-year in December. Sentiment surveys, most notably the Tankan survey, have generally improved in recent quarters, consistent with steadier economic growth ahead. While these encouraging economic trends remain in place, and with global economic conditions perhaps more benign during the early part of this year as the U.S. economy advances at a steady pace and with Fed policy on hold, we view these conditions as most conducive for further Bank of Japan rate hikes. Against this backdrop, we continue to forecast a 25 bps rate hike to 0.75% at the BoJ’s April announcement. We now also forecast a final 25 bps rate increase to 1.00% in July, while acknowledging that the timing of that final rate hike could get pushed back depending on how local and global economic conditions evolve. Overall, we think the outlook for Bank of Japan tightening and eventual Fed easing could lead to a reasonably resilient yen through 2025, with more sustained and substantial yen weakness perhaps more likely in 2026 as the U.S. economy recovers.

Source: ACTIONFOREX

Source:scmp