Global Trade Tensions and Tariffs Shape Economic Outlook for USD and CAD

Today's expected range for the Canadian Dollar against the major currencies:

US Dollar        1.3630-1.3870

Euro                 1.5840-1.6090

Sterling            1.8200-1.8460

WTI Oil (opening level) $66.21

The CAD/USD is opening at 1.3754 ( 0.7271 )

USD continues with its struggle to attract any meaningful buyers amid the growing acceptance that the Fed will resume its rate-cutting cycle in September. Apart from this, a modest recovery in Crude Oil prices, from the lowest level since late June, touched on Tuesday, underpins the commodity-linked Loonie and weighs on the USD/CAD pair.

Meanwhile, Trump's executive order to raise tariffs on Canadian goods from 25% to 35% dampens the outlook for exports and the domestic economy. This comes on top of the Bank of Canada's dovish pause earlier, which could cap the upside for the CAD and act as a tailwind for the USD/CAD pair, warranting caution for bears.

Headlines

·    Trump said the U.S. and China are nearing a trade truce extension, easing tariffs and export restrictions. He might meet President Xi by year-end if a deal is made, he claimed. The truce expires August 12.

·    Trump warned that if the EU fails to make agreed US investments, tariffs will rise to 35%. If investments occur, tariffs will drop to 15%. He also reiterated plans to substantially increase India's tariffs within 24 hours due to its russian oil purchases.

·    Trump told CNBC's "Squawk Box" on Tuesday that tariffs on imported pharmaceuticals could eventually reach 250%. He plans to start with a "small tariff," raising it to 150% and then 250% within 18 months.

·    USISM Services PMI fell to 50.1 in July from 50.8 in June, missing the 51.5 forecast, showing sector stagnation. Business activity, new orders, and inventories all slowed, while price pressures reached their highest since October 2022 at 69.9 versus 66.5 expected, with tariffs affecting commodities a major concern.

·    The US trade deficit fell to $60.2 billion in June, the lowest since September 2023, from $71.7 billion in May, exceeding the $61.6 billion forecast. Imports fell 3.7% to $337.5 billion, led by declines in pharmaceuticals, cars, crude oil, and nuclear fuel. Exports decreased 0.5% to $277.3 billion, affected by drops in metal shapes, nonmonetary gold, and computer accessories.

·    A Bloomberg exclusive says that russia is weighing options for a concession to Trump’s demands for a ceasefire in the war on Ukraine in the form of an “air truce” that would pause drone and missile strikes. US envoy Steve Witkoff is set to visit Moscow this week ahead of an deadline set by Trump, who is said to be readying sanctions against russia’s “shadow fleet” of oil tankers delivering crude exports around the world.

Key Points

·    Equities: Weak ISM services; Trump tariff threats; mixed earnings; European resilience

·    Volatility: VIX down to 17.85; curve in contango; expected SPX move ±33 pts

·    Digital assets: ETH ETF outflows hit record; IBIT, ETHA drop; SEC easing on staking

·    Fixed Income: US yields back up on soft US 3-year treasury auction

·    Currencies: USD edges lower after weak US ISM Services, JPY takes the upper hand

·    Commodities: Gold miners hitting record highs as rate cuts loom