The dollar looks set to end the week on a more supportive footing after Donald Trump redoubled his efforts to revive the forgotten art of letter writing, threatening to substantially raise tariffs on Canadian goods and warning that he would soon announce increases in levies on most other countries. Ten-year yields are little changed, equity futures are setting up for a softer session, and currencies like the euro and Mexican peso are retreating as investors brace for the next round of trade threats. The European Union will get a letter “today or tomorrow,” NBC quoted the president saying last night, and “We’re just going to say all of the remaining countries are going to pay, whether it’s 20 percent or 15 percent. We’ll work that out now”.

The US president sent a letter to Canadian Prime Minister Mark Carney last night, outlining a 35-percent tariff rate on goods categories not covered by existing sectoral levies, and complaining that Canada was maintaining tariff and non-tariff trade barriers against the US while allowing fentanyl to flood across the world’s longest undefended border. Media organisations like Bloomberg and Reuters later quoted administration officials saying that the new, higher tariff rate would likely be waived on goods that comply with the United States – Mexico – Canada Agreement, but were careful to note that the situation “remains fluid” and “no final decisions” have been made*. An exemption could significantly reduce the impact on the Canadian economy, but the negative hit to overall uncertainty levels and business sentiment could nonetheless slow growth in the months ahead.

This comes after the president abandoned any semblance of an economic rationale in imposing 50-percent tariffs on Brazil. In a letter published on Wednesday afternoon, Trump singled out the country’s “witch hunt” against President Luiz Inacio Lula da Silva’s right-wing predecessor, Jair Bolsonaro, who has been accused of attempting to topple the government after the 2022 election. Trump criticised what he called Brazil’s “insidious attacks” on free elections, censorship orders against American social media platforms—including his own Truth Social—and unsustainable trade deficits against the US. Lula responded to Trump’s letter with a statement saying that the judicial process against Bolsonaro is being conducted by politically-independent institutions, that any unilateral American measure to increase tariffs would be met with reciprocal measures under Brazilian law, and pointing out—correctly—that the US typically runs trade surpluses against his country.

Markets seem broadly untroubled. After a series of delays and climbdowns, investors have become benumbed to incremental trade war developments, and measures of volatility remain near their historical averages. This might seem unremarkable, given that market valuations tend to trend higher over the long term, but this placidity could lull the president into an exceptionally-dangerous reflexivity loop, encouraging him to increase tariff rates in an unrestricted manner—or at least, until something breaks. Trump told NBC last night, “I think the tariffs have been very well-received. The stock market hit a new high today”.

The Canadian economy added substantially more jobs than anticipated in June, sharply lowering the likelihood of a rate cut at the Bank of Canada meeting later this month. According to Statistics Canada, 83,100 new positions were added in the month, with the bulk of the gains coming from the wholesale trade and retail sectors. The largest share of the new jobs came in part-time work—with 69,500 roles added against 13,500—but the unemployment rate slipped to 6.9 percent and total hours worked rose 0.5 percent from May’s print. The average hourly wage for permanent employees increased 3.2 percent from a year earlier, down from 3.5 percent in the prior month. Several key data releases are set to land between now and the Bank’s July 30 decision—including June inflation and two quarterly surveys closely watched by monetary policymakers—and the outlook could change, but we suspect that the balance of risks will remain tilted toward an autumn move, particularly given that the current overnight rate, at 2.75 percent, is already within most estimates of the “neutral” rate. Although few would suggest that the economy is poised on the edge of a recovery, markets have cut the odds on a July move in half relative to pre-release levels, to around 15 percent.

The British pound is trading on a dramatically weaker footing after the UK economy contracted for a second consecutive month, surprising forecasters who had expected a modest expansion. According to an update published by the Office for National Statistics this morning, output shrank -0.1 percent in May after declining -0.3 percent in the prior month, with both the manufacturing and construction sectors contracting at the fastest pace in almost a year, while services activity slowed sharply. We think this is mainly down to policy-driven “bullwhip” effects—given that the economy generated stronger-than-expected growth in the first quarter as manufacturers front-ran US tariffs and homebuyers engaged in a flurry of activity ahead of the April 1 transaction deadline—but there is little doubt that economic slack is growing, putting downward pressure on inflation and clearing the way for more easing from the Bank of England. Odds on a rate cut at the central bank’s next meeting in August are little changed at around 90 percent, another move is expected by year end, and market participants have turned more bearish on the currency itself, driving it down in each of the last six trading sessions.

*Code for: we need to ask Trump himself.

**An argument can certainly be made for reducing non-tariff trade barriers in Canada—most businesses and consumers in Canada would like to see supply cartels broken down, interprovincial restrictions reduced, and a more generalised shift toward boosting long-run competitiveness. But fentanyl is not flooding across the border. Between 2013 to 2024, 99 percent of the pills and 97 percent of the powder seized near US land borders came from Mexico, and the bulk of the remainder could be attributed to cross-border cartel operations delivering to customers in both the US and Canada. The economics of producing fentanyl in Canada and smuggling into the US simply don’t add up.

Also, apologies for the interruption in service yesterday morning, technical difficulties prevented my note from going out. You will be pleased to know, however, that after repeated viewings of ‘The IT Crowd,’ my computer has learned to turn itself off and on again. It just hasn’t learned to stop doing that.