EM LATAM CREDIT: Fitch Affirms Province of Entre Rios' Ratings

We’ve updated our Hawk-Dove Spectrum for 2025, with the rotation of regional president voters bringing in Chicago Fed’s Goolsbee (dove), KC’s Schmid (hawk), St Louis’s Musalem (hawk), and Boston’s Collins (neutral/dove) for 2024. (Out are the neutral/hawkish Bostic and Barkin, hawk Hammack, and neutral/dovish Daly).

• All participants remain on the dovish side of the Hawk-Dove line in absolute terms, reflecting the Committee’s overall easing bias.
• However most of the Dots have been moved in a more hawkish direction in the last 6 weeks, in light of the more limited cuts seen in the December Dot Plot and the growing sentiment that the FOMC can remain patient in deciding when to cut next.
• We now regard Hammack as the FOMC’s biggest hawk, though only marginally over her colleagues Bowman, Schmid and Musalem.
• Conversely, Gov Waller has ensconced himself as one of the pre-eminent doves on the Committee, seeing potential for 3-4 cuts this year, and possibly restarting the easing cycle earlier than market pricing implies (though he spoke after the December CPI data).

• CIBC: Full 25% tariffs look unlikely. They see USDCAD peaking at 1.461 and 1.468 with 10% tariffs or 1.478 and 1.496 with 20% tariffs under carve-outs for both energy and auto sectors or just for energy sectors.
• “The market implied probability of spot moving above 1.4610 by Q2 is just over 20%; above 1.4960 is just over 10%. This implies that while high-stake tariffs are not expected to be the base case, the market has assigned a larger-than-zero chance that they can happen.”
• DB: In a full 25% tariff scenario with no fiscal response, USDCAD should move to “at least 1.53, with a very real possibility that it tests the 2002 all-time highs of 1.61. By extension, USD/CAD is one of the most under-priced FX crosses for an FX trade war.”
• ING: “USD/CAD has been flat since the start of the year, and still embedding a 3% risk premium associated with the risk of Trump’s tariffs – according to our short-term fair value model. Even if unilateral 25% tariffs on Canada don’t materialise, smaller universal tariffs would still asymmetrically damage the economy of the main US trade partners. […] To rebound at this stage, CAD requires more reports suggesting a lighter-touch approach by Trump on trade. Barring that, we expect the risk premium to linger and some support around 1.430 in USD/CAD.”
• JPM: “1.55-1.58 is consistent with full pass-through from our USD tariffs beta [with permanent tariffs and no carve-outs]. […] But those elevated USD/CAD targets could prove temporary” if negative spillover back to the US impacts the USD leg, “providing some eventual offset to higher USD/CAD estimates.”
• “USD/CAD sub-1.40 is possible if no tariffs are ultimately introduced, risk premium is depriced, CAD shorts are trimmed, and less trade uncertainty allows other improving domestic factors to boost CAD.”
• MUFG: “If there’s no sign of negotiations or progress in negotiations and Trump keeps repeating his plans, we will see USD/CAD and USD/MXN jump notably higher. Our USD/CAD forecasts for Q1 and Q2 (1.4500 & 1.4400) did not incorporate a broad-based 25% tariff. The 2020 high (1.4668) and the 2016 high (1.4690) would likely be taken out quickly and a move into a 1.5000-1.6000 range (last seen in 2003) would come into play.”

Ahead of next week's Fed decision, we've published our summary of FOMC participant communications since the December FOMC meeting, including analysis of the latest Beige Book and MNI's Hawk-Dove Matrix. 

PDF Analysis:

FedSpeakJan2025.pdf