Trump’s tariff turnaround

Sam: Good afternoon and hello everyone. Thank you so much for joining us today at such a short notice. My name is Sam Chatterjee, and I work on the interest rate hedging desk here at Scotiabank. Navigating current market conditions has definitely been difficult and the past few days only made it more challenging. We are seeing unprecedented levels of volatility across financial markets. So, we are seeing G10 currencies tread like emerging market currencies. We are seeing U.S. Treasuries, long thought to be the safest of financial assets, trade like credit products. We are seeing swap spreads touch levels that we previously didn't think possible. We thought it might be a good idea to bring together Sean and Roger from our strategy groups to discuss current market conditions and help us prepare a framework of how we should think about rates and currency markets in the days ahead. I'm assuming most of you are familiar with Sean and Roger. They are specialists from our strategy group and Sean focuses on currency markets and Roger focuses on rates markets.

Before I hand it over to Roger, I just wanted to kind of mention one quick thing throughout this presentation, you can submit your questions and we will have time at the end as well for Q&A and we will try to get through as many of your questions as possible, time permitting. Now with that, I will hand it over to Roger, first to talk about rates markets and then Sean will take over on the currency markets.

Roger: OK. Thanks, Sam. So, I'm Roger Quick. I do rate strategy here at Scotia. I know we have quite a broad audience here. So, I'm going to give kind of our overview of what we think is going on in the current market mayhem and with US tariffs and how we think that'll impact Canada. I'll talk about what I think that means for rates and, and then Sean’s going to talk about the currency side. In the initial part, I'm going to avoid getting into too many details about bond specific stuff or swaps, but we're certainly happy to cover some of the more details and questions after just keeping in mind, you know, bearing in mind that it's, it's quite a wide audience speaking with today.

So, it's been a, uh, just a dramatic week in the market. Really massive volatility yesterday, as you know, I think everyone on this call knows. So, Trump blinked on his last week's massive tariff threat. Skinny scaled that back. So now he's imposing 10% tariffs on the countries he targeted last week in the reciprocal terrace, which were quite onerous. They went well beyond being just reciprocal and you know, so on the surface, that's, that's sounds like pretty good news. Less owner is tariffs and an administration that sounds like it's willing to negotiate. So, you know, that raised the prospect. Maybe, you know, elevated tariffs aren't the long-term plan here. And stocks as everybody saw had just a massive turnaround rallying some, you know, 10% or so on the S&P and in in the bond market, we had just massive interest rate moves, you know, 30 basis point rise in in in 30-year yields, or they rose initially, then they declined 25-30 beeps and two year yields initially declined and then they rose 30 beeps just a just massive moves.

On the surface, you know, there is a good news element to the story and that things weren't quite as onerous as they were it had been looking. But you know, it’s not as great a story as it might initially seem. You know, from first, we're still talking about 10% on the countries Trump targeted last week. That's still a high level of tariffs. Trump escalated the tariffs in China. They were already, you know, he already doubled them or roughly doubled them to 104%. Then he raised them to 125% yesterday. So, you know, just a massive number there. You know, presumably over time they'll negotiate that down. But it doesn't suggest, you know, it's, it's pretty tough to think that that tariffs are declining, you know, dramatically back to, you know, pre before this administration let’s say. And then so, you know, still quite high tariffs overall, very high tariffs with China. But then of course, uncertainty is very, very high. You know, U.S. policy has kind of flip-flopped back and forth a few times. And because last week was very, very extreme in terms of the level of tariffs, it's difficult to know exactly what the administration is trying to achieve. You know, we know some of their goals. Maybe it's more a question of the ways they're going about achieving those goals. But even so, it's a very uncertain environment.

So, you know, our best take is that this is all still quite a negative for growth in the US and globally. When we were putting this call together this morning, we thought we had a pretty good story that a lot of yesterday's massive moves would start to reverse. But you know, as it turned out, that happened in really dramatic fashion today with U.S. Stocks down again quite significantly and the US yield curve rest deepening. But you know, I, I do think that we're probably looking at, you know, a weaker growth outlook going forward and a more significant, you know, elevated levels of uncertainty going forward.

So, in terms of what this means for Canada. Canada and Mexico, as you know, we did a call last Thursday and we noted then that comparatively we got through the reciprocal tariffs pretty well. In fact, they didn't apply to us to Canada or Mexico. The US administration basically recognizing that there is the free trade agreement, and you know whether that's a newfound faith in free trade or whether it's just because they know they were going to be legal challenges and that those agreements are up. That agreement is up for renegotiation anyway in a year and a bit. Either way, Canada and Mexico escaped that round last week and yesterday we were basically, you know, unaffected by the event by the announcement yesterday, although there was a confusing, confusing messaging around that. So, on the surface, you know, that's a positive for Canada in that we aren't being subject to the more immediate increased tariffs. But, you know, in the bigger picture, if, if things are worse, you know, US growth is, is going to get hit by this kind of trade policy, global growth is going to get hit more by this trade policy. That's still going to come back and be bad for Canada. So, it means, you know, maybe we avoided the immediate hit of, of an escalation in tariffs, but the long-term picture is, you know, is, is not so good.

I think one key theme we've talked about on these calls and, and in written publications is that there is a, a good news story or a silver lining in this for Canada in that, you know, it has been a wakeup call for Canada that we need to get, you know, our economic house in order. We need to do things such as, you know, diversifying our export markets, improving infrastructure, improving things that will help productivity, reduce regulation. There's been a lot of, you know, talk about reducing provincial interprovincial trade barriers. And there's, we've seen that shift in both, you know, leading political parties in their in their platforms as well. And so, there's a real, you know, there has been a real recognition of this. And I think given the uncertainties continuing and even though we escaped the worst of the tariff escalation, I think I don't think that story has changed. And I hope, you know, that it does. We don't lose the politicians don't lose that momentum, because I think those kinds of things are still needed.

In terms of what this means for Canada, for interest rates, for the currency, so I do think it means deficits are still going higher, government spending is going up. There's going to be other measures as well that aren't strictly speaking government spending, but there's potentially going to be a lot of additional spending as well. And so that you know, in terms of what that means for bond yields, that will tend to mean it keeps pressure on mid- and longer-term yields keeping them somewhat higher. There’s also a significant case for that in the US as well. And we'll come back to that maybe in the questions. At the front end of our curve. You know, I think the fact that we escaped the worst of the terrorists maybe take some of the imminent pressure off the Bank of Canada to act. But I do think there's a pretty good chance they'll have to lower rates again. You know, my, my bet is that they go to kind of the low side of their, their range of, of neutral 225 to 325. So, I would, I would bet they get down to 225. But you know, it, it'll depend very much on how all of this plays out.

Clearly both the Canadian and especially the US central bank also have to be very mindful of the inflation type influence of tariffs. That's in my view, that's a somewhat bigger thing in the US. Now we didn't see it today in the CPI, which was weaker. There wasn't the tariff passed through there. But I think it's a pretty good bet that'll start showing up in their numbers going forward. So, you know, it's unclear whether the bank would cut next week. I'm assuming likely not, but we'll see how things develop. And there is an inflation number for Canada the day before. So that's going to, you know, probably be the final determinant of what they do then. But I do think there's scope for some further rate cuts. And so, I think this means in terms of our yield curve, I think this means shorter term yields can move somewhat lower still, maybe back to we got to quite low levels earlier this week where we were pricing in a terminal rate of say 2% for the Bank of Canada. That might be getting a bit too much, but I think that keeps shorter term yields lower. And then I think, you know, the ongoing elevated deficits, increasing bond supply will tend to keep longer term yields higher. And I think there's a, there's a, a similar thing, perhaps more extreme going on in the US whereas we saw earlier this week, and you know, some concern with the kinds of trade policies the US is pursuing, given they depend heavily on foreign investors. What happens if those foreign investors start to diversify away from holding US assets, if they sell some of their Treasury holdings or or not? I think it's probably unlikely that they actually sell, but I think it's, you know, they could, they could start reducing their purchases, buying less, gradually diversifying away from the US. And so that's something that can put pressure on us yields. And so that's a sign. You know, it's something that we used to think would have been pretty much unthinkable. And in the last couple of years, it's kind of a little bit back on the radar as a possibility. And I think we saw, you know, we've seen that play out a bit with the kind of bear steepening of the US curve. You know, going back to September through to the election, we saw a fair bit of that happen. We saw it again earlier this week. It's happening a bit today. Well, you know, I think that is a risk going forward.

So, you know, overall, while it's been a dramatic move, you know, I think, I think we're still looking at pretty significant tariffs and a whole lot of uncertainty. And so, I do think that keeps the Canadian government here having to spend more and I think it keeps pressure on longer yields and probably allows more central Bank rate cuts, keeping short-term yields low. I'm going to stop there in and give and I know we have limited time, and I know there's room for questions. And so, I'll hand it over to Sean Osborne, FX Strategist, to talk about the view from his from his world.

Shaun: Great. Thanks, Roger. I think Rogers put quite a nice frame around the issues that we're looking at across markets this week. Just from my point of view, I just emphasize the fact that we're dealing with tremendous amounts of uncertainty here. You know, this tariff, this whole tariff rollout has been chaotic, somewhat capricious and quite opaque. And that's adding to I think the sort of volatility that we're seeing in markets at the moment. And in a sense, we've got, you know, something for reprieve that the 90-day reprieve essentially that Roger mentioned in a sense good news in that we're not going to see these massive tariffs loaded on the US's major trading partners. But on the other hand, it's just meaning another three months of uncertainty until we get some clarity on exactly what the US is trying to do and what it's trying to achieve. And I think they're again still tremendous amount of uncertainty about whether I think as we've mentioned in these calls before, these tariffs are there for leverage to obtain certain concessions from the US trading partners, which some administration officials suggest is the plan or whether it is a long term semi-permanent situation that generates revenues that will fund tax cuts for this administration. So tremendous amounts of uncertainty, I think for markets, extremely and that is really what I think came to a head this week with the markets really starting to register or registering a pretty significant protest to the policies and how they've been wheeled out from the US.

So, I think the key take away from me over the past few days has been the fact that the US dollar has been weakening alongside softer U.S. Treasuries and weaker U.S. equity markets. It's very, very unusual to see all three asset classes weakening in that manner, and that's typically not a sign of market confidence in the kind of economic policies that are being pursued by the government of the day. The last similar situation I think that we can sort of draw or tease out comparisons to be the situation we had in the UK in 2022 when the trust government was trying to pursue unfunded tax cuts, which prompted a significant decline in the bond market in the UK, a weaker pound and some significant disruption to the UK equity market. It actually involved the Bank of England effectively trying to intervene or intervening in the in the bond market and the guilt market in the UK to stabilize rates. And that situation did spell the end of the trust government and a complete reversal of government policy. I don't think we're going to get that with the US at the moment. So, it seems like we're going to get more of the same. But the situation of a weaker U.S. Treasuries, A weaker U.S. dollar and weaker U.S. stocks is with us again today. And it does suggest a degree of a high degree of impatience I think in the markets with the, the policies have been pursued and markets are doing what markets have typically been able to do in the past. And that's actually have a disciplining effect on policy. There is no doubt, as Roger mentioned, there is no doubt that yesterday's decision by, um, the Trump administration to bring back these tariffs just 12 months, 12 hours, sorry, 12 hours after they came into effect was completely to do with the reaction of the bond market. It didn't have anything to do with the art of the deal. I don't think or the fact that there were some signs that some countries were trying to negotiate. This was completely a reaction, in my opinion, to the situation we saw or develop in the bond market in the US, which was looking at certain points yesterday to be quite significantly destabilized.

So where are we in, in terms of FX at the moment? Well, the dollar is continuing to weaken. We've seen a roughly 2% fall in the US dollars today. The Canadian dollar continues to pick up ground, although it is lagging, we're seeing investors denied or refusing the opportunity to take refuge in the US dollar or U.S. Treasury bonds take refuge in in other assets such as the Yen, the Swiss franc in particular, which is up some 4% today and gold. The CAD has benefited from this dollar weakness to some extent, and I think the likelihood is it will continue to benefit at least in the short run. There is no off ramp for tariffs at the moment. And as Roger mentioned, even though we had this rollback yesterday, when we look at the average weighted, um, trade weight, average trade weighted level of tariffs that the US is imposing at the moment, there's actually been no change from yesterday's decision to earlier in the week. So, the average trade weighted tariff is still around the 25% mark, which is extremely high. And of course, as Roger mentioned, 10% tariffs is still significantly higher than the regime that we had prior to this departure.

So, it seems to me as if the dollar is likely to stay soft. We've trading at multi month lows for the dollar against a range of currencies including the Canadian dollar, even though the CAD move has lagged a little bit relative to its major currency peers. But I think this level of volatility and uncertainty is going to be with us for quite some time. So that could mean significant moves up in the Canadian dollar. It could mean actually significant moves down as well. I think in the background there has been some um, fundamental improvement in the uh supports for the Canadian dollar that comes in the form of slightly narrower interest rate differentials between the US and Canada. So, we look at the two-year swap’s spreads or two year cash bond spreads. They have narrowed quite dramatically over the past few weeks supporting the Canadian dollar’s gains to some extent. But I don't think those moves explain the strength in the Canadian dollar that we're seeing at the moment below 140 for the first time in a number of months. And it looks like we could see another two or three cents off this move off the US dollar in the in the next in the next few weeks.

What's really going on here is a move against the US dollar. And in a sense, you know, the dollar, a weaker U.S. dollar probably will have to be part and parcel of the reordering of global trade that the US is trying to execute at the moment. But there's also a significant shift away from the dollar. I think from an investor point of view, just total discomfort with the kind of policies that that the US is pursuing at the moment. And that's clearly been reflected in, in the very significant shifts in the dollar that we're seeing over the course of the past week or so. That trend is probably going to continue. It seems to me that we're looking at least another couple of percent off the US dollar in the short run. And I'm starting to be a little concerned that this this could be a move that actually starts to pick up momentum and potentially gets a little out of hand if unless we see some moves towards a tariff off ramp in a general sense pretty quickly. So that would entail China or the US the making some significant concessions that would I think get us on the road to a more and more obviously negotiated end to this to this tariff situation. That doesn't look likely at the moment, unfortunately. So, more volatility, probably more dollar weakness, U.S. dollar weakness is, is the likely cause of events over the over the next few weeks.

I will say that as Roger mentioned, you know there are some constraints potentially on the Canadian dollar. Obviously high tariff world is going to slow global trade, slow global growth and weaken commodities. We've seen significant losses in commodity prices and energy prices in particular this week. WTI down very significantly. And that's the kind of environment that typically is not favorable for the Canadian dollar. So, we need to be cognizant of some of these potential constraints on the cancer performance, but we also need to be cognizant at that investors are generally or appear to be registering a significant protest against the against the kind of policies that the US administration is pursuing at the moment. And that could continue to play out negatively in terms of the US dollars general performance. All right, Sam, I'll leave my comments there and hand it back to you and maybe we can answer any questions that our audience might have.

Sam: Thanks, Shaun. We have, we have a lot of questions. So, what I think what I'm going to try and do is maybe categorize them in topics and go over some of the key topics that I think we can address within the time frame of this of this call. The first, the first topic that has come up and which is very close to my heart as well is the status of U.S. Treasuries as safe haven assets and related to that the status of U.S. dollar as a safe haven asset as well. So, the question is. Is it going to change in the near term or even in the medium term? And how should clients and investors think about that?

Roger: I'll start with it and take the US Treasury side. Yeah, I mean, this has been, it's received a fair bit of talk in the market. And, you know, I think it has been behind some of the yield movements that we've seen this week. You know, if the US is intent on entering, you know, a significant trade war and becoming or kind of reducing its role in the world and becoming more isolationist, then one side effect of that and risk of that is that people will be holding fewer US bonds over time. There's certainly the risk that, you know, some of the large holders could choose to send a message and reduce their participation in an auction now and again as well and to kind of send a warning shot over the bow. I think, you know, it probably plays out more so as other countries starting to reduce their diversity or diversify away from holding as many US assets as reserve assets. So, yeah, you know, I think that has been an issue this past week. I think it explains why there's been that pressure on longer yields relative to shorter term yields. Um, and, you know, it is something that could ultimately become quite significant because if the US is, is literally intent on getting rid of their trade deficit, the other, you know, counterbalance the other balancing side of that is of course, the capital account. And, and, you know, if they still have all the debt, but they don't have the foreigners lending the money, then, you know, they're going to have to probably offer higher yields to get domestic investors to buy.

So, you know, it's one of those things that, as I think, I think I said in the beginning, you know, it used to be almost unthinkable or for so long it was, but it has come back on the radar. As you know, it might still be a very low probability event, but it's come back on the radar as something that is now a risk. And it has been happening over the past couple of years. We've seen episodes of the market becoming more worried about deficit levels in the US and you see that materializing, longer yields rising relative to shorter term yields. And you also see it for those in in our audience today who are familiar with the interest rate swap market. You see it in the relationship between bond yields and swap rates. Swap rates are kind of a close substitute for bond yields, U.S. government bond yields. But as concerns about the deficit rise, US bond yields rise, swap spreads relative to swaps and those the spread between the two goes more and more negative. And that's we've been seeing that play out for quite some time in the US. And, you know, there were some dramatic moves in that in that corner of the market this week as well.

Shaun: Yeah. And from the FX point of view, I think, you know, this is essentially a made in the US crisis. So, it's, it's understandable that the US is not benefiting fully from, you know, essentially a known goal. And that's been scored by the pursuit, the pursuit of these kind of policies. That's a short run consideration. I think the longer run consideration runs along the lines at the of the issues that Roger just raised. If we're talking about the, you know, a balanced effectively trade, which is something that President Trump seems to want to achieve, that reduces it's potentially the demand for US assets from investors who recycle these trade surpluses, their trade surpluses into U.S. dollars and U.S. dollars, Treasury bonds. So, if that trade deficit goes away, presumably the demand for those assets will shrink considerably, which will have a weakening effect on the US dollar.

The US seems to want to be in a situation where it can retain the best of globalization, but get rid of the, the worst, in their opinion, consequences of globalization. And I'm, I'm not fully sure that that is a, a situation that is, um, or a position that's achievable. And there's all the contradictions in, in terms of the kind of policies they appear to be pursuing at the moment. And it, it may well be that this is the kind of thing that forces investors to reconsider their exposure to, to the US, not just sovereign wealth funds and, and the large investors, but, you know, retail, retail investors. the US is becoming more isolationist, as Roger mentioned, less friendly place to do business potentially. And it may well be that we see, you know, continued an ongoing process of repatriation or, or reduced exposure to the US markets going forward.

We have seen that to some extent from central banks that would say of the past five years, not necessarily an aggressive or active move away from the US dollar, but we certainly have seen a passive diversification away from the US dollar. Aware U.S. dollar reserves have not grown at all in the last five years. Where we've seen growth is in the smaller currencies such as the Canadian dollar, Australian dollar, but also clearly in gold which has shot up and tremendously over the past few years,

Sam: Right. And I think that's that really sheds some colour on how we should think about the current situation in terms of deleveraging, moving away from the US market, both in terms of Treasuries and U.S. dollars. So, there is a specific question related to this situation and it's the role of China. Maybe if, Roger, you can start and then Sean, you can take over as well. In terms of how we should think about if China were to deleverage, move away from U.S. Treasuries, is there a risk of China buying gold and how will that impact U.S. markets and global markets as well? And is there a possibility of the Chinese currency being eventually pegged to gold? Maybe, Roger, if you can start.

Roger: So, you know, I do think with the kinds of tariffs China has been hit with, you know, that is going to significantly affect their exports. That is something that will have, you know, natural downward pressure on their currency. So, they can probably let that happen. They may choose to offset it to some extent. I don't know that they would necessarily be directly selling US as they might. They might it’s possible you know, as a as a part of the negotiation to send a warning shot by by doing some of that. But I would, I would think over time that they would express it more as a gradual, but continued, you know, shift into other markets. But you know, I think so I think, I think that that is something that likely does play out to some extent overtime. I'm, I would assume that we had, they don't end up with tariffs at the current levels for, for the long run. They end up with something a little more reasonable. But you know that China does seem to be the US administration's main target. So, you know, I think that probably is ongoing

Shaun:  From a currency point of view. I guess the main, the main risk I think from my perspective at the moment is that, you know, we've seen a little bit of softening in, in the Chinese yuan. The authorities did allow a slightly weaker yuan fixing of the course of the past few days. So, around these 720 levels 41 is where the authorities have tried effectively pegged the top of the fix over the past few months when we did see a slightly higher U.S. dollar effectively fixed. So weaker you aren't fixed only by a margin, small margin, but it was perhaps a signal from the Chinese authorities that this is one route that they could pursue. And that's something I think we need to be mindful of if if the US continues to pursue very aggressive tariffs in China. There are some leave us potentially that, that China could pull essentially, you know, devaluation and we, you know, remember back to 2016, I guess, 2015/2016, that kind of volatility that you want devaluation, uh, played out on markets. Central banks have been buying gold. I was just trying to check my phone. I don't have the numbers in front of me, but gold purchases have risen significantly dramatically over the course of the past over the past few years by I believe it's in the region of 3 1/2 to 4000 tonnes of gold. Um, but don't take that as red. Um, so central banks, particularly, um, the, the large holders of now some of that is to do avoiding the US dollar for sanction reasons.

So, we're talking, you know, the Russians, Chinese, Indians of the world, right brick economies, but these central banks have essentially been snapping up tremendous amounts of gold. I think that's, that's something that probably will continue. Gold is an inflation hedge. We're looking at inflationary risks at the moment. So even from, you know, your average investors point of view, probably an increased interest in, in precious metals these days, whether the yuan can be backed by gold or not, highly doubtful. I don't think there's probably not a route that we'd probably want to consider anywhere in the world at this point. Going back to a gold, gold backed currency regime. It doesn't deliver what its people think it says on the tin and I think it would create more problems than it would resolve at this point. So, I'm not a not a big fan of that idea.

Sam: That's fantastic. Thanks. Thanks, Shaun. So, this definitely remains a very interesting topic, and we'll keep monitoring, uh, switching gears a little bit. I think some of the questions are focusing on the possibility of an emergency rate cut more so in US as opposed to Canada. But maybe, Roger, if you can shed some light on what is the risk of an emergency rate cut in the US and how should we think about the Bank of Canada in that context?

Roger: Yeah, so it's a good question. Um, there was some talk about this earlier in the week. Uh, you know, if things get really bad in the US to the point where they start to see the financial system kind of seizing up, then, you know, I think an emergency rake up becomes somewhat more possible. I think though, you know, the Fed's going to be pretty reluctant to do that and they have other non-rates, noninterest rate tools. They could use it or more focused on addressing market liquidity and I think they'd much rather try those, you know, and, but on the interest rate side, I mean, the US is going to have even though the CPI today was weaker, the US is going to face upward pressure on at least measures of inflation for some time as the tariffs hit. And you know, they drive up import prices, they drive up competing goods prices against those tariff imports. So, they're going to see it measures of inflation. They're going to be, you know, there's a case that that's a onetime increase in inflation essential bank and look through it. Sure. Um, I think they probably will, but they're going to be reluctant to cut in that environment. So, I think that that's going to be in the back of their mind. Do we really want to be easing if we can avoid it? So, I think they would rather not do an emergency, but there are some things that they may be able to do instead. They can, you know, they have lots of emergency lending tools and things like that. They can do things to make accept more collateral to to improve liquidity. There was speculation this week that they might, uh, there's these leverage ratios in the US that have, they were put in place to make essentially to make borrowing treasury securities a little more costly. And so, there's things like that that they might be able to relax in the event of a crisis. And I think they would use those kinds of approaches if they can avoid having to do an emergency rate cut. You know, they have a much more nuanced set of tools than they used to have way back in, you know, Greenspan's day or whenever.

Oh, and so for the Bank of Canada, yeah. I mean, I think it's, it's, I think it's less of a, you know, it's, it's tough to say, but I think let's say, let's say there's the latest improvement didn't really happen. Let's say the tariffs were still, you know, quite bad. I don't know that a trade war and a tariff war is playing out with the same urgency or, or immediateness that a financial crisis does. And that's when, you know, you tend to have gotten emergency cuts. So, it's possible. But, you know, I think you'd need to see something really escalate. At the moment, it looks like it's going to play out a little bit more in slow motion with Canada, where, you know, we've avoided the worst of the tariffs now, but the outlook for the rest of the world isn't great, and that's not good for Canadian growth. And so, things are slowing. So, yeah, I think we need I think we need something approaching more of a crisis to warrant an emergency cut.

Shuan:  I was just going to say, you know, this this question often comes up in the context of weaker equity markets. And, you know, the idea of the notion of a kind of a Fed put in place to put a floor under equity market side. Never been a big believer in in that idea. But nevertheless, it's something that does perpetuate around the markets. I would just say that, you know, I agree with Roger, it's unlikely we'll see a rate cut at the moment. But the, the notion of maybe a, a kind of congressional put might well be there in the sense that I think if we see this market volatility extend and, and, um, evolve to something even more serious over time, there's going to be tremendous political pressure, I think, on the administration to change its course. Because a number of Republicans now have their eye on the 2026 midterms and they know that a recession or if perpetuation of this crisis is going to be bad news for them at the polls,

Sam: Right. And while I have you, Shaun, I think one related question is, and there's been quite a few questions on this topic in terms of Fair value of dollar CAD. And I know it's an, it's almost an impossible question to answer in this environment, but maybe not in the near term. In the medium term, where do you see dollar CAD and how should our clients think about it?

Shaun: Yeah. So, for the first time in quite a while, so in, in quite a number of weeks, probably since February, Dollar Canada is actually trading below our fair value, our short-term fair value estimates. So, we run a fair value model that's really based on a lot of short-term dynamics, swaps, swap spreads, bond spreads, market volatility, commodity prices, that kind of thing. So, the fair value model has been tracking lower, which does suggest that the underlying fundamentals essentially spreads I think, but also the generally weaker tone of the US dollar have been shifting in the CAD favour. But fair value this morning I think was around the higher 141 area. So, we're, we're trading quite significantly below fair value at the moment from a short-term point of view, which may constrain just how much further we can see the US dollar weaken. Interestingly enough, you know, the longer run macroeconomic fair value models generally pitch at the moment anyway CAD fair value around about the 140 points. So that's where some of the longer-term macro models are suggesting that fair value is, is right now. So, we may be stretching, stretching CAD gains here to some extent from a medium-term point of view, but that's not to say we can't see the cat continue to say relatively strong in the short run,

Sam: Right. And now moving back to the rates curve, Roger, there's been quite a few questions around how clients should think about ranges for 10-year Treasuries and 30-year Treasuries. And the other topic is thinking through 30-year treasuries, why your long, long yields increasing while we are seeing this much volatility and macro macroeconomic weakness driven by US policies?

Roger: Yeah, excellent questions. You know, I think it's a, it's a bit of a tug of war between a weak growth outlook and increased issuance or versus increased issuance and elevated inflation measures. I would think that, as I said, I think the increased deficit story is with us for some time, and I think that will tend to keep some pressure on longer term yields in Canada. We'll come back to the US in a second. And so, you know, it may be that in deteriorating economic news environments and things like that, we get back to the, you know, yield lows that we had earlier this week, 320 or so on the on the US longboat on the Canadian long bond. Don't have a strong view though that we get a whole lot through there. And I think the risks are that that, you know, kind of more like the way it's trading today that we see pressure on, on longer yields and, and a somewhat steeper yield curve in the US, I think it's a little bit more extreme. Uh, you know what I do think today, it's a situation of, well, today we also had the weaker inflation data in the US and so that alleviated some fears that you're going to start seeing pass through of tariffs in an, in the inflation numbers. So, it hasn't happened yet. It probably is going to happen down the road, but you know, that does give the Fed a little more room if they are thinking of cutting rates to do that or you know, so that that I think explains some of the movement, the front end. Some of it is also just relief that it wasn't a stronger inflation print yet.

But I think, you know, at the long end, I think it is this concern that we've been talking about, you know, just elevated deficits to begin with, meaning lots of bond supply, but then also the uncertainty and the isolationist U.S. Policy of where this policy is going and that being something that, you know, the risk that foreign investors start maybe not selling but not buying as many US bonds. And that is something that tends to keep pressure on longer yields. And you know, that's it might be a low risk, but it's something that that that that could get worse. And this sort of erratic policy type measures aren't going to necessarily help there.

Sam: Right. And I think this is probably going to be one of the key topics to watch in terms of like how long yields move and if there is a disconnect between the rest of the curve and the and the long end of the curve. Yeah, we're definitely going to watch it very carefully and discuss with our clients. Switching, switching gears a little bit, let's focus on tariff negotiations. Once again, there's a lot of questions on tariff negotiations on the chat. So maybe if we can end this, Roger, Shaun, this is for both of you. How should we think about kind of differences and negotiation tactics? And do you think there will be a situation where maybe Europe and Canada will align with the US and China might not? And what might be the implications, broader macroeconomic implications for that for Canada and the US?

Shaun: I guess anything is anything is, is possible. Sam, I, I, you know, I think the big, the big issue right now is that it's very difficult for anyone to negotiate with the US until they get a clear handle on what the end goal of this tariff regime is. Is it something that's going to go away through negotiation? Is it something that's going to be there, you know, somewhat semi-permanent state, as I mentioned earlier to raise revenue, to fund tax cuts. So that's, that's still, I think for me, you know, a major impediment to making any sort of progress on negotiations at this point. Now, whether we see, you know, Western Hemisphere block emerge. That apparently was Elon Musk's view of, of the world. He's recently maybe been whispering that in President Trump's ears that, you know, free trade, freedom of movement between Europe and the US is something that will be desirable. Possibly, but maybe only by the time we land on Mars. I don't know. I think that's going to be that's going to be difficult to difficult to achieve in the long run.

I think at the moment, you know what the Rogers mentioned this, you know a number of times the US appears to be going down. A more isolationist, more mercantilist route, which suggests that, you know, it's not going to be in favour of these multilateral agreements, which is, you know, the rage in the machine at the moment is against this kind of exactly these kinds of arrangements. So, I'm not sure that that's something that this administration would necessarily want to pursue,

Roger: I'll add a couple of things. But I mean, I agree with what Sean said. I would say I have heard people, and I think it's this is partly rat trying to rationalize the US policy saying that, yes, it is aiming at eventually targeting China. China is the one threat. And you know, clearly, yeah, admittedly yesterday's announcement is in that direction. But if that's, if that is the goal, it is an unusual way to go about it where you are attacking your, you know, former allies and friends and things. It's presumably there would be a better way to achieve that goal where we're kind of all a little more aligned. So, you know, maybe that's where this is heading, but I don't know, it's tough to it's an unusual way to get to that approach.

The only other thing I'd add on trading negotiation, I think Canada's approach so far have not retaliating in full. I think that's the right kind of approach. I mean, we have to recognize the same way as Mexico. You know, trade with the US is a huge part of our economy and even more so with Mexico. And we're not going to win writing, you know, tariffs dollar for dollar. So, it makes sense to try to be a little more strategic and, you know, use tariffs periodically to send messages. But I think we ultimately, we were going to have to have an agreement with the US as well. You know, there are biggest trading partner. And even if we were able to diversify into other export markets, there is still going to be by far the most important,

Sam: Right, I think we will have to wait and watch and find out if there will be a new alliance or how the new world order might look like or if there will be a new world order. Unfortunately, we only have time for one final question and this one will be for you, Roger. Moving swap spreads over the past few days. This is a very specific question. Can you shed some light on why that move happened and how we should think about spreads going forward?

Roger: Yeah, it's been wild. And you know, for those of you who aren't involved necessarily in this part of the market, I mean, a swap is basically, you know, it's a fairly close substitute for a U.S. Treasury security. But the things the relationship normally would be pretty tight, but it's been pretty volatile this week. What happened, the main thing going on was as the market was selling off and adjusting to this threat of really big tariffs globally and the US administration seemingly sticking with that plan, concerns went up about, you know, weaker US growth, larger US deficits, more bond issuance. And so that more bond issuance that's putting upward pressure on the yield. If you think of the swap rate being here, the yields rising and that's the spread between the two is becoming more and more negative. And so, we saw that play out in really dramatic fashion, I guess Friday, Monday, Tuesday and maybe early yesterday morning. It's a blur and then reversed dramatically when, you know, all the good news came out and the tariffs are just 10%. But yeah, and, and in by the standards of how things move in those markets, you know, a five-basis point move in one day is massive. And so that is one area where we can actually see it playing out in the market. Now there's positioning and other things that are affecting it as well, but you can actually see that influence of expectations of US bond issuance relative to another close measure and being expressed in that divergences between those two closely related interest rates. So, you know, I think that is something that is, is a, an indicator of, of the bond supply and concerns about that. And it's something that, you know, it also is related to positioning and how illiquid the market is. But that's going to be a key measure to keep an eye on going forward. There's some other background, other related things as well related to whether the Fed would, it really would, would reduce or ease up on some of the leverage rules and things like that. But the main thing driving it was I think this concern about potential significant increases in bond supply and or foreign selling of bonds, which would also push those yields up relative to swaps,

Sam: Right. Thanks so much, Roger and Shaun, I think both of you hit on some very key points and helped us through these very uncertain times develop at least some sort of a framework how we should think about both rates and currency markets. Unfortunately, that's all the time we have for today. And if we didn't get to your question or if you have any specific question related to your industry or sector, please feel free to reach out to your Scotiabank representative and we'll get back to you as soon as possible. I'll leave all of you with one parting thought.

We have been very busy on our desk throughout this. Trying to help clients navigate either risk management policies or frame effective hedging strategies or even planning execution through these very difficult market conditions. So, we are here for you. Please reach out to have discussions with us and we'll get through this together. With that, thank you everyone for joining. Have a great rest of the day. Take care.