Into ECB & NAFTA

Markets stabilise on reports that Trump will expempt NAFTA countries from tariffs. As we move to the ECB press conference, all currencies are down against the USD while US indices bounce off their 100-DMA and attempt breaching their 55 DMAs. Draghi's press conference will focus on the ECB's latest revisions for growth and inflation and any takes with regards to trade wars and the FX implications. EURUSD pushed higher after the ECB rates announcement removed the reference to the possibility of increasing the QE program if necessary.

The focus was squarely on the Canadian dollar on Wednesday and it delivered a tumultuous day. The loonie slumped after the Bank of Canada highlighted trade worries and household debt. A s a result USD/CAD climbed to 1.3000 from 1.2910.

But some of those worries may be quickly calmed if reports that Trump will exempt NAFTA countries from the tariffs prove to be true. The market reacted by erasing the move in USD/CAD and sending it back to 1.2900. The possibility of a waiver was something we warned about yesterday. The that shift also helped stock markets recover into a flat close.

In the bigger picture, the landscape remains deeply unsettled. Relief for Canada and Mexico might be coming but that leaves the rest of the world still subject to a harsh tariff and a high likelihood of retaliation. Cohn's exit may also highlight that tariffs and are part of a broader White House agenda that he wasn't comfortable with.

Another troubling development was an increase in the US trade deficit in January to $56.6B compared to $55.0B expected, including a record in the deficit excluding petroleum. The sharp deterioration in the past four months suggests the tax cut funds are adding to imports at the margin and that could accelerate. In turn, that will make Trump more likely to take dramatic actions on trade.