USD: Volatility here to stay - ING

The first day of Donald Trump's presidency was a volatile one for FX markets. The US Dollar (USD) tumbled before the inauguration as markets got tipped off by media reports that Trump would not impose tariffs on day one. The large dollar long positioning into the event and potentially some thinner liquidity due to US holiday may have exacerbated the move. In the slew of day-one executive orders, Trump confirmed the establishment of the External Revenue Service tasked with collecting tariff and duties, ING's FX analyst Francesco Pesole notes.  

Markets are at least cautiously optimistic

Other executive orders declared a national emergency at the border and on energy, and unwinding some of former president Joe Biden's green energy measures. However, later in the day, Trump said he would likely impose 25% tariffs on Canada and Mexico by 1 February. That generated a rebound in the dollar - with CAD and MXN erasing daily gains. Still, DXY is trading around 0.7% off Friday's close, as markets are at least cautiously optimistic that indiscriminate universal tariffs won't be delivered all in one go. Understandably, European currencies and those exposed to China are receiving the most support. At this point, there is more downside room for CAD and MXN to fall should Trump follow through with the tariff threat."

"Canada is currently led by outgoing prime minister Justin Trudeau, about to face a Liberal Party leadership contest for his replacement, and likely to face early elections. It was reported that Canadian officials had already laid out plans to retaliate against US tariffs targeting products that would asymmetrically damage US producers compared to the domestic impact on consumers. We estimate USD/CAD is embedding just above 2% in risk premium. That is less than in previous weeks, signalling markets may still not fully price in the 25% tariff risk and opening up more upside potential for the pair. Canada will also release CPI data today, but that will likely have limited impact on the currency. We expect a USD/CAD rally north of the 1.45 area for now."

"Despite yesterday's positioning readjustments, dollar net longs likely remain stretched. For reference, we calculate that CFTC net dollar positioning versus reported G10 currencies was at +24% a week ago, the highest since June 2019. With that in mind, European currencies and China proxies can hang on to gains for a little longer. Data will play a secondary role this week as all the attention will be on Trump's first executive orders. Incidentally, the Federal Reserve is in the quiet period ahead of next Wednesday's meeting. Expect a lot of 'headline trading' and short-term noise, with risks still skewed for a stronger dollar."