NextGen Treasury: Managing FX and Rate Risk in the Trump Era

>> Good afternoon, welcome to the latest edition of NextGen Treasury.  My name is Oscar Johnson, I'm the U.S. Head of sales for treasury and payment solutions at BMO.  Our aim is to deliver great content and ideas that are timely and relevant to you.  NextGen also provides you with the opportunity to receive CTP credits for attending each educational session.  Today we've covered topics ranging from liquidity and cash to cyber fraud and AI.

Today my colleagues will be discussing a very finally topic:  How to manage FX and rate risk in the Trump era.  With that, let's begin.

>> DEAN:  Thanks Oscar.  Good afternoon, everyone.  Welcome to the latest edition of NextGen Treasury.  I'm Dean Gillis, managing director and head of global trade and global transaction banking, and I'll be your host today.  Now that the new U.S. administration is in place, few can argue that the policy changes and promises are on top of everyone's mind.  We acknowledge this is a politically charged time and our role in this discussion is to help interpret some of the communications based on the current facts.  You can appreciate if we had the NextGen Treasury virtual event yesterday we would be having a very difficult discussion.  During his presidential campaign and inauguration speech President Trump promised lots of change of a wide range of policies.  In his second term, he has announced potential tariffs on goods to U.S. trading partners.  Here we are, one of the keys to successfully navigate the economic policies in short and longer term.  It's on focusing interest rate swings, foreign exchange exposures and trade risks.  Today my colleagues and I will be discussing the recent news and how to manage the volatile markets.  We will explore how the U.S. administration proposed changes may impact operational cash flows, balance sheets and hedging strategies and discuss practical solutions to day ahead in this rapidly evolving environment.  I'm joined by two of our BMO subject matter experts.  I'm sure they've had little sleep in the tariff whirlwind and announcements between the countries and their effects.  Jennifer Lee is the senior economist and managing director at BMO.  She has a strong reputation for her thoughtful analysis on the U.S. economy as well as commentary analyzing financial markets and economic activity in Europe and Japan.  Welcome, Jennifer. 

I'm happy to introduce Stephanie Petti as director of corporate sales and structuring at BMO.  She works with commercial clients to execute strategic management solutions and help manage foreign currency and interest rate exposures.  Great to have you, Stephanie. 

Our conversation will start with economic outlook followed by managing FX and rate risk.  Let's begin as we have a lot to discuss and digest.  Jennifer, walk us through the macro view of what we're seeing.

>> JENNIFER:  Hi there and thank you, everyone for spending your afternoon with us on the fourth of February.  I would like to think that the events for the past few days are a great example to expect the unexpected to sort of roll with the punches and stay limber and flexible.  This is certainly the new environment.  You need to expect this with the new administration.  I will quite the ICB ollie from Finland.  This is not only about economics but also about politics.  I think that's very true.  Yours truly has been wishing for clarity.  I think we had it, not sure what we have now.  But let me just -- how many or me and let me go through the timeline briefly.  It was Saturday February 1st.  The executive orders were signed.  25% tariff on Canadian imports going into the U.S., 10% if talking about energy, 25% for Mexico, 10% for China.  Those were all effective February 4, which is today.  So that was all invoked under the international emergency economic powers act.  IEEPA.  That is because of the boarder crisis, illegal my grants and fentanyl.  Even though Canada and Mexico were granted a 30-day breathing room or pause, the damage is done.  Think about the scurry of activity leading to all of this, calls for exemption, the auto industry wanted to carve out the synergy sector, even the United Steelworkers union said lashing out at key allies such as Canada is not the way forward.  There are a lot of wheels in the legal world being turned in progress because everyone was lawyering up and there were lots of detailed lists of retaliation measures.  They had to be detailed because trade with the U.S. is a big deal.  Canada imports 375 billion dollars worth of stuff from the U.S., about half of title imports.  40% of those imports were going to be subject to tariffs, like 155 billion, orange juice, and yours truly loves that, peanut butter, coffee, wine, appliances, clothing, second rant would be beef and cars and pork and big ticket items.  Mexico was going to apparently have a carousal retaliation, which means they are sort of going to rotate or change up what is being tariffed, in order to keep the US on their toes. None of this had to be done because of negotiations, and a deal was made, short-term deal, but a deal nonetheless.  That I think we all agree was good news.  But if anyone thinks this is it, I think that's probably going to be the wrong thought.  We have China still out there.  They have a 10% tariff now in place.  China has already retaliated although the moves are somewhat modest.  Starting on Monday, February 10 there will be a 50% tariff on things like LNG and coal.  That's going to kick in and then a 10% levy on things like farm equipment and crude oil, auto pick ups and things like that, and export restrictions on some rare Earth minerals.  So the big question is going to be how is the U.S. going to retaliate, are they going to retaliate against these retaliatory measures.  So that is the question, what is next to follow.  I think all trading partners should be nervous.  I used to say only those running surpluses, but anyone trading with the U.S. should be pretty nervous.  They've already threatened the European Union.  I don't know if it's next, Japan.  They mentioned the UK but President Trump said they may work things out.  Vietnam is another example.  This is just the beginning, with these 30-day delays.  Then there is another deadline coming up, April 1, that's when President Trump ordered federal agencies to look at all these different countries that the U.S. does trade with to see if there's anyone with a persistent trade deficit, if there's any companies unfair trade practices or anyone manipulating their currencies, are they holding them down.  By the way that's interesting, because the U.S. treasury has their semiannual report on currency manipulation.  So far no one on that list has officially been labeled a manipulator.  We will see how that changes.  But I think at the end of the day we should be expecting more tariffs, just unclear, I like to call it the W5.  Who, what, where, when, why know the why, but the how.

>> DEAN:  I appreciate the insight.  But this is coming when Canada's political leadership is also in question.  Bad timing, isn't it?

>> JENNIFER:  Very bad timing.  There is never going to be a good time.  We don't have an official leader.  We do with prime minister Trudeau, but we are now in a race.  Canadian parliament is until march 24.  So the liberal leadership race again in full swing is basically between two players.  Mark Carney who was the former Bank of Canada Governor, also the Bank of England Governor and Christian Freeland, used to be deputy prime minister, so they will decide who will be the new liberal leader on March 9 and what is likely going to follow will be a no confidence vote and assuming that the liberals lose -- big maybe, but you never know -- assuming that the liberals lose, we will probably have a spring election.  If they don't lose, then at the latest the election will be in October.  So basically in spring or October.  In the meantime the government is still operating in terms of these global issues.  Everything we've heard about is still operating.  Any fiscal measures that the government mentioned during last budget is probably on ice.  So lack of leadership is very bad timing.  This is, by the way is situation we are seeing around the world?

Germany they had coalition collapse, election coming up in February 23rd.  In Norway, one of the wealthiest countries in the world, their government collapsed last week, bit of a surprise.  Even in France, right now there looks to be a little stability.  But they have their fourth prime minister in the last year.  That's a lot.  All this is happening as this political tornado is ripping across both borders of the United States, and it's almost like "Whac-A-Mole."  Trying to deal with everything domestically and all your other stuff on the international front.  This is what is happening.  While these other countries are -- the leader of the free world is basically doing almost everything that he said he was going to do during the campaign trail, so we cannot be too, too surprised.

So again, humor me.  I'm going to recap what he did on the first day.  Signed a lot of executive orders, he dealt with immigration, sent thousands of troops to the southern border to seal it off and kicked off this massive deportation effort and now the U.S. has help from Mexico and Canada.  Dealt with clean energy, walked back a bunch of President Biden's EV mandates, plans to increase fossil fuel development.  He blamed energy for the runup in inflation.  So he's going to quote "drill, baby, drill" that's the idea.  I believe they're still setting up the ERS external revenue service, not sure he has authority to do that without Congressional cooperation.  And manufacturing, he wants to bring a lot of the manufacturing back home to the U.S.

So back on the tariffs, yes, we had some relief because of that 30-day reprieve, but -- we felt relief before and it was short lived.  So I want to give everyone out there some facts.  Majority if you think about this, the majority of all U.S. exports go to Canada and Mexico.  33% of all exports go to these two countries, and those exports cover over 70% of all export categories, so it's very broad.  7% of exports in total go to China.  So the bulk of it go to Canada and Mexico.  Some Canadian facts, 75% of all our exports go to the U.S. and roughly half of everything that Canada imports come from the U.S.  So there's a very -- trade is obviously very, very tightly linked.  Of course it differs by pro convenience and sector.  President Trump also mentioned the EU.  The BRICS and again, I think anyone with a trade surplus or any trade with the U.S. should be nervous.  Look what happened with Colombia.  Threatened with 25% tariffs.  Didn't go into play but the whole threat lasted a couple hours.  I think we've got to give the Trump administration marks for efficiency and speed getting the stuff through.  We are barely through the first month of this administration, but they hit the ground running.  People with a mission.  Look at Marco Rubio, he was passed, then on the phone with Vietnam discussing trade deficits.  Trying to get a lot of the stuff done over the next few months.

I don't know, but I'm curious whether or not DOGE is learning from this.

>> DEAN:  Thank you, Jennifer, that was certainly a lot to digest.  With all these things going on, what are the implications are from the tariffs or lack thereof in the short term or in the next few months?

Why don't we start with the U.S.

>> JENNIFER:  Implications.  A lot of moving parts, which I think everyone can appreciate.  I think most of us are glad that we didn't see that blanket tariff that was first threatened that would cover all $3 trillion worth of imports, although confidence to do a James Bond thing has been shaken and stirred.  It's interesting, even the moderates, like treasury secretary Scott Bessent weren't able to shake him and he was the one pushing for gradual dissent.  Maybe he did.  But a tariff will be used for non-trade reasons.  So the implications for all this, Mexico and Canada obviously won themselves one month's time, one month's reprieve sending troops to the border.  That's a positive for both.  But again, confidence has been shaken up.  We are wondering what is next in the next 30 days or April 1st, with the findings of the trade situation.  Now we're going to focus on the next country besides China, and the EU has been named.  In terms of implications for the U.S., I think a positive for the U.S. economy that those tariffs were not going into place, because they are basically quite broad-based and comprehensive.  Again, they had the biggest three trading partners of the U.S.  Which is like 40% of all the U.S. goods imports.  Now it's just China, by the way, and they import for I'm going to say 13%, but that doesn't include countries that China is going around just to get into the U.S.  But 13% directly from China.  What would have happened.  Humor me, if we saw those tariffs come into play.  We would have had immediate supply chain disruptions in the industries and cars is probably the easiest one to think of.  You will see probably shortages of products in the stores.  Near-term price spike for these imports because these are the U.S.'s largest trading partners.  You will see a lot more financial volatility as markets are trying to figure out this ever-changing macro economic landscape.  Ultimately we would have seen lower growth, just because of all the tariff increases and retaliation.  We had -- notice the past tense -- lowered our GDP growth for this year and next.  Going back to where we were before this happened, roughly 2.4% for this year and 2% for next year.  But obviously as we can all fully appreciate, things change very, very quickly.  Could get worse, could get better, just depends on financial bank's response, how Central Banks will handle and the government is going to handle these things.  I would also like to mention that American consumers by the way would have felt just the pain of inflationary impact.  You would see prices rise.  I don't know if it's going to be immediate.  There is a lot of stockpiling ahead of all this.  We saw inventories and imports rising ahead of these potential tariffs that everyone knew about for months.  There's also the potential port disruption as well.  You saw businesses stockpiling.  How long those stocks are going to last remains to be seen.  But I think U.S. importers would have borne the initially higher cost and ultimately passed most of it down to consumers.

I wouldn't be shocked by the way if we would have seen domestic producers, the ones who compete against these imports, they would have also pushed the prices higher as well.  Well, everyone is doing it, they could blame tighter labor markets, supply chains, so you could see prices rising there, too, and probably eventually show up in the CPI.  That's what the Fed is going to be watching.  Stronger U.S. dollar, et cetera, et cetera.  So -- and I'm also very curious whether or not companies would be forced to eat up some of these higher costs.  Water under the bridge for now.  Uncertainty is obviously a very bad thing.

>> DEAN:  Indeed.  Uncertainty is a very bad thing.  What about Canada?

>> JENNIFER:  Well, that would be very bad.  If we didn't get that 30-day break, I think it would be a lot worse for Canada.  You have to make assumptions when you are making forecasts.  We have to assume that the tariffs would have lasted likely about a year.  Before this we penciled in just under 2% growth for 2025, with all these tariffs and assuming they lasted a year, we would have seen all that growth erased.  Recession, we would not have been able to dismiss the possibility of a recession.  Again, because trade with the U.S. is a huge deal.  Now again, exports, just to repeat some of those factoids that you threw out earlier, 75% of all our stuff heads to the U.S. which is about 20% of GDP we would see our supply chains disrupted, which slows down business activity and consumption.  But one thing still holds, reduced business investment and I think that still holds, again, businesses are still wondering what is next, what is the next shoe to fall?

We would have seen lower domestic demand from all these tariffs and weaker dollar.  Inflation would be maybe 1 percentage pointless higher than it is now.  Of course we would have had some buffers, weaker Canadian dollar, which is a good thing for exporters.  We would've had lower interest rates, thank you, Governor Macklem.  Fiscal support.  Because Ottawa was already already to step in with some relief.  These supports, but -- this is assuming that tariffs would have been revoked after a year or so, so we would have expected modest recovery next year.  But again, we will have to see how things go.  Would have also had big implications from the motor vehicles sector, iron and steel, aluminum.  Our agriculture sector would have been impacted a lot as well.  Oil industry, housing market.  Housing market recovery which we were expect be would be on ice.  It would have recovered probably next year, as interest rates come down.  That's all looking backwards.  We are looking for slower growth than before this weekend.  Just on heightened anxiety.  But in the meantime I still think it's going to hold back on all the things I was mentioning like business investment and capital influence.  There was long term damage.  I think we're going to see inflict on Canada's economy.

>> DEAN:  Now on the U.S. side, a lot of people are wondering about the implication of these efforts.  What should we be watching for in the short term and what industries will feel the affects the hardest.  Jean Jean that is.

>> JENNIFER:  That's a great question.  The labor market right now broadly speaking is still very tight.  4.1%.  Unemployment is still historically low.  I would be watching all the job surveys, not just one, a bunch have different survey responses and some are low are.  But to make sure they are all pointing in the same direction.  I would be watching food costs as well.  The sectors impacted the most I think are going to be the agriculture because 50% of workers on American farms are undocumented workers, so if you imagine that all those people are now unable to work, so you're hiring legal workers and they are demanding a lot more in terms of wages, and benefits and all that, construction industry is another one highly reliant on undocumented workers, and California for example is one state that's going to be needing a lot of massive rebuilding.  I should also mention that even though those are the two big sectors that I can think of, agriculture and construction, but also legal workers, those on H1B visas, there are a lot of them running to the lawyers making sure they are covered and okay to stay in the U.S.  There is going to be impact on money, wages, benefits.  So you have to watch those sort of things as well because they can be inflationary.  Those are the short-term things I would be watching.

>> DEAN:  What about will long term things should people keep an eye on?

>> JENNIFER:  Still watch wages, to see how sticky prices are going to be.  People are going to be paying more for wages, trading, all this stuff.  And this could spill over into inflation, there could be indication on CPI in terms of stickiness.  Should also mention, not inflationary related but even though these undocumented workers aren't paying income tax, they are still paying into the system.  Sales taxes and property taxes, so that means potentially less revenue for the federal government.  I could also think about things like whether or not trade relationships can be mended.  In terms of the labor force itself, even before lately -- over the last year or so, you've been seeing this divergence, my hand signs here, rapidly growing foreign-born labor force population where the domestic born labor force is starting to slow.  So this is going to cause that spread to continue to widen.  And this is where it gets a little on the scarier side.  It's not as if we're adding to the pool of workers either.  Look at fertility rates, hit historic low of 1.6.  The magic number is 2.1.  That is the definition of a number of children that a couple would have to have over the course of their reproductive years to replace themselves.  2.1.  Right now the U.S. rate is 1.6.  So that's really, really low.  At the same time this is a fact that I love to talk about.  4.1 million Americans last year hit that magic age of 65.  They are calling it the silver tsunami.  That's going to continue happening.  That's going to be one of the unintended consequences, I think, of these deportation efforts.

>> DEAN:  So when we reflect over the last couple months, does anything really shock you?

President Trump said a lot during the campaign.  What this brought up.  Is this something we need to get used to?

>> JENNIFER:  I think we have to get used to the shock factor.  I was more surprised, more like wowed how quickly and efficiently he got to work dealing with deportation, the borders, the tariff threats.  I wasn't particularly -- I was a bit surprised with the tone of his speech at the world economic forum, basically threatening all countries to bring your production into the U.S. or you will be facing tariffs.  So I think we should be prepared for some follow-through.

>> DEAN:  Okay.  Understanding this is still early what does this mean for global growth?

>> JENNIFER:  So the fact that the tariffs have been tabled for now, at least for the next 30 days, I think that's helpful.  But that's still a risk out there, that we all know tariffs are a bad thing.  Maybe good temporarily for national security dealing with unfair trade practices, only if temporary.  But they have a lot of negative consequences, and definitely inflationary.  All this is coming at a bad time.  There is no good time for tariffs.  When you're looking at places like China.  They are already dealing with a lot of their own issues, domestically with very weak property sector.  Demographic front.  Record low birth rate, the highest death rate since 1974.  They actually raised the target age as well.  Dealing with a lot of domestic issues and now -- also in Europe public infighting with Germany.  So it's very difficult when you've got all this political infighting to get anything done.  My hope for Germany as an example, that the government will release the debt rate, which would be very helpful for Germany.

>> DEAN:  So what is Powell going to do and the Bank of Canada?

>> JENNIFER:  I don't know.  Powell I believe he said he's going to do his semiannual testimony on February 11.  A week from today.  Right now we expect the Fed will sort of stay on hold until midyear.  We had a change Fed chair Powell said they are in no real hurry or no rush to tighten policy -- sorry, to ease policy anymore.  Going to sort of sit and wait and see how the data play out.  This is going to be some messiness and noisiness in the data, depending on what happens with tariffs over the next month or so, if anything does happen.

Right now we have the Fed on hold until midyear, lowering rates until just over 3% by second half of 2026.  Bank of Canada, we are going back to we were before the weekend happened.  So we look for two more rate cuts by the way.  They have been easing so aggressively, I don't know how much more they need to do.  We have the Bank of Canada rate going down to 2.5% by October of this year.  Of course everything is data dependent.  Meeting by meeting, I love to quote that, but that's how we see things right now playing out.

>> DEAN:  Well, thanks on that Jennifer.  I'm going to give you a little time to catch your breath and now we're going to be speaking about the U.S. dollar.  Stephanie, can you walk us through your views on the currency front?

How are you guiding other customers through this?

>> STEPHANIE:  Thanks Dean, thanks for having me this afternoon.  When you look at currencies, we really need to see how this all plays out before we can get a clearer picture for the future.  What we do now is the trade war has large implications for the FX market, and this was never more evident than yesterday when we saw Canada and Mexico necks whipped on the news, tariffs announced and quickly taken off.  Given there is no precedence for moves of this magnitude and there are so many questions outstanding, if and when the tariffs start, how long will they last, what other countries will be targeted, how those countries will retaliate and so on.

So for the time being, increased uncertainty and market volatility will continue to be the key themes.  Even with that being said, there is little debate that tariffs will lead to increased consumer prices and inflation in the U.S.  Particularly if major trading partners retaliate.  Could even further delay interest rate cuts by the Fed.  This comes at a time when core inflation is elevated.  Job market is strong and consumer spending is solid in the U.S.  So getting back to the U.S. dollar, if you take a look back at last year, let's remember we started the year expecting to see 175 basis points in rate cuts by the Fed as a response to their dual mandate, stability and maximum employment.  They were headed for economic slow down and there were concerns about the viability of a soft landing.  However, when other central banks started to initiate their easing cycles in March the Fed remained on the side lines.  As a result we saw the U.S. dollar appreciate by about 3% in the -- as a return presidency, otherwise known as the Trump trade, we saw the dollar take off due to post election policy prospects for higher tariffs and lower taxes, this result the in index through year end, all the while the Fed cut rates by total of 100 basis points.  So with the fed rate cuts, fewer Fed rate cuts, threat of heavy tariffs, it was understandable to see the U.S. rally, volatility rise and nearly every major currency weaken against the dollar in 2024.

>> DEAN:  Stephanie, what is your outlook for the U.S. dollar this year?

>> STEPHANIE:  Dean, that's a great question.  I first have to give a disclaimer that given all this uncertainty my confidence around these Visas is very -- right now.  However if large scale tariffs do materialize permanent, I would expect to see a significant impact on the currency market.  Particularly for Mexico peso.  Euro, but that could easily extend to the G10 while the economies adjust to the impact of higher tariffs.  However in the short term it will take time to U.S. importers to find new sources of supply which will cushion the immediate impact of tariffs on foreign economies.  I also expect the Fed to proceed cautiously with rate cuts given potential for more stubborn inflation.  Just last week FOMC meeting there was no surprise that the Fed remained on the side lines and communicated to the market they aren't in any hurry to cut again.  They maintained their rate cuts for 2025, this was after moving them down from 100 to 50 basis points at the prior meetings.  If we look at market expectations there is one rate cut this year with a second cut, the Fed not expected to make its next move until at least June, as Jennifer mentioned.  So again, we're in a situation where there is a growing divergence between the expected movement by the Fed and most of the rest of the Central Banking universe.  A longer term view is more difficult to pin down as well need more clarity around trade policies, which are changing daily.  If large scale tariffs do move forward, we will eventually see an up surge in inflation, slower growth, and the Fed may have no choice but to keep interest rates high, providing continued support to the U.S. dollar.  However, if it turns out that the tariffs were, in fact, a negotiating tactic and are quickly repealed, then I expect to see the Fed resume its rate cuts and the dollar start trending weaker over the course of the year.  On top of all this we still have the impact of tech, cuts and deregulation to consider.  So our heads are spinning and we're only two weeks into this new administration.

>> DEAN:  So I do appreciate your view on the U.S. dollar, and what is happening this year, and yes, it certainly is very dynamic and fluid.  I think the term I keep hearing in the news all the time is that term fluid.  I think that's going to be our board of the year, I think.  So what is your outlook -- sorry, and what are your expectations then for the foreign currencies?

>> STEPHANIE:  When we look abroad we see the dollar index hovering around its two-year low with the hardest hit currencies those facing significant tariffs threats, China, Mexico, Canada.  However, other major currencies such as euro and the pound have not been spared.  After the tariffs were announced the Canadian dollar and Mexican peso had fresh lows, which was no surprise, given the announcement, before recovering today to about where they were trading at the end of last week.  The peso broke its three-year low while the Canadian dollar pushed to its lowest level in 22 years.  The weighing on the peso, down about 30% since the April high are also the judicial reforms together place and downward trend in inflation that's expected to continue.  So I view the risks for both currencies to be tilted to the down side under the Trump administration.  But as Jennifer mentioned, the irony is the more the currencies weaken the better it will be for both Mexico and Canada.  So a permanent 25% on tariffs on exports to the U.S. risks pushing Mexico and Canada into recession, but currency weakness also helps to absorb some of that impact.  Mexico's Central Bank actually meets this Thursday, and it's widely expected they will cut rates due to sluggish economic growth and decline in inflation.  Interestingly, with the exception of the gap lowered yesterday we've seen the Chinese renminbi strengthen.  I think that's because of the 25% imposed on Canada and Mexico and significantly less than the 60% he mentioned when he was on the campaign trail.  Also Chinese reaction to the tariff announcement in terms of retaliatory measures is widely viewed as being largely symbolic at this point and leaving them open to further negotiations.  But looking forward, we'll have to see if the current measures escalate into a full-blown trade war with China, and will the U.S. retaliate to China's retaliation?

So regardless, I expect Beijing will continue with its commitment to adopt a proactive fiscal policy and moderately lose monetary policy in 2025.  China's economy continues to be weighed heavily from weak job market and ongoing shock from its housing downturn.

>> DEAN:  Thanks, Stephanie.

>> JENNIFER:  Can I say something?

>> DEAN:  Go ahead.

>> JENNIFER:  Parentally president Xi and Trump are supposed to be speaking.  Are they going to be exempt as well from the 10%?

So we will see, wanted to throw that in there.

>> STEPHANIE:   Ever changing.

>> DEAN:  Can you provide some additional insight on the Canadian dollar?

>> STEPHANIE:  Sure, Dean.  Prior to this weekend the Canadian dollar had already bit hit particularly hard.  Since October we saw almost an 8% move largely as a result of the trade uncertainty and also the divergence in monetary policy with the U.S.  The Bank of Canada has maintained an aggressive easing cycle which is likely to continue this year, while the Fed has become much more cautious.  So just last week we saw the Bank of Canada cut rates by 25 basis points to 3%, with a total reduction of 200 basis points this makes Bank of Canada the most aggressive cutter in the world this cycle however, given that Canada's economy has been showing signs of improvement with increased consumer spending and in the housing market, I kind of question whether the bank would have proceeded with this cut had it not been for the threat of tariffs.  Also going into this weekend the Canadian dollar was already the worst performing currency this year and it's still trading near its lowest level in two decades.  Looking forward the tariffs could be a major drag on the economy.  They have to be addressed by a loser fiscal monetary policy mix leading to further weakness in the currency.  So while the market has another two cuts priced in by the summer, which is BMO's base case, I think the risk is that the bank cuts more than the market expects if faced with a true trade war.  This was evident yesterday before the tariffs were delayed 30 days, when there was talk of an emergency rate cut before the next Bank of Canada meeting in March.

So you know, if a lengthy trade dispute with the U.S. does materialize, I think we could see rates in Canada fall by as much as 150 basis points this year with dollar CAD making a push towards 1.50.

>> DEAN:  Okay.  What about the political climate in Canada?

We're going through a process right now.  How will that impact the Canadian dollar?

>> STEPHANIE:  Well, the political situation is not helping.  With Trudeau's resignation, Canadian government at standstill until the next PM is chosen.  So there is -- as a result I expect we will see quite a bit of movement in the Canadian dollar during this time, but overall I expect it to remain weak.  If U.S. tariffs end up being rolled back, we will likely see some recovery in the Canadian dollar which could be further supported by domestic political uncertainty and eventual end to the Bank of Canada's easing cycle.  This should help the Canadian dollar recover by year end, but my confidence of this happening right now is pretty low.

>> DEAN:  Now that we've talked about North America, what about when we look across the pond?

>> STEPHANIE.  You have sure.  And Jennifer, feel free to jump in here as well.  While the UK seems to have been spared for now from tariff talks, it sounds like the European Union is Trump's next target.  So I wouldn't be surprised to see the euro hit parity this year as their disinflation story has been more aggressive than ours and there's more optimism around rate cuts than the ECB central Bank hiked rate points last week, this was after cutting a total of 100 basis points last year.  The market does expect another 75 basis points for 2025, although the pace of that is debatable.  While inflation has moderated plenty of economic and political uncertainty remains and many worry that if rates stay too high for too long, inflation could fall below target and economic growth could remain weak.

>> JENNIFER:  By the way, I want to pipe in.  We also have -- my thing is I've got the euro hitting parity by March, so we will see.  We have the European deposit rate hitting 2% by march this year.  Looks like a done deal, but after that there could be more room for deeper and broader debate on what comes afterwards, because there are still some hawks out there afraid of being too early.

>> STEPHANIE:  Thanks, Jennifer.  Yeah, the story is a little different in the UK comment on the UK quickly, given that the U.S. doesn't have a trade deficit.  And because their economy is very much service-driven.  But also due to the inflation pressures there falling more slowly as a result, I think the Bank of Canada will proceed more cautiously with rate cuts going forward.  That being said they are dealing with stagnant growth that will likely support the bank to move forward with a 25-basis point rate cut.  Their meeting is Thursday.  So primary interest from the announcement will be the number of votes in favor along with the rationale in support of the cut as we look to guidance for future meetings.

>> DEAN:  Great.  We did receive some questions from our participants in advance specifically about Japan.  Can you talk about the yen?

>> Stephanie:  Sure.  So the yen was one of the hardest hit currencies in the back half of last year with 13% decline between the September high and the January low.  The yen has suffered from a wide interest rate differential with the U.S. while the bank of Japan removed extremely dovish despite above-target inflation and wages.  That sent the yen to its lowest level since the '90s.  However, after -- to negative rates in March, the bank has been cautiously tightening and is expected to continue on this path in response to the acceleration in core inflation, which has helped the yen recover.  Also the yen is safe haven currency.  It's provided support to the yen as well, when markets are trading in risk-off mode.  Japan stands alone.  It's the only major economy where the Central Bank is expected to raise rates in 2025.  So we could see some appreciation there.

>> JENNIFER:  It's a long time coming.

>> STEPHANIE:  Sure is.

>> DEAN:  With so much uncertainty, what strategies are you seeing clients use to manage this risk?

>> JENNIFER:  Well, good question, Dean.  You know, I think on the whole we are seeing clients manage their risks and rethinking their risk management strategies.  So I like to think as risk management as a spectrum of different approaches and the related tools.  So for example, companies that never hedged previously are now looking at implementing hedging programs.  And companies that used basic hedging structures like forwards or swaps are looking into more forward solutions such as options or going further out.  So what has become clear is companies are preparing for ongoing volatility and long term uncertainty and taking a more thoughtful approach to risk management.

What I found really interesting was when we saw back in October when we had over the course of the month a sharp 7.5% move higher in the dollar index due to that Trump trade.  For many companies that were unhedged this move exposed a weakness in the structure of their FX exposure in cases where they didn't have active risk management program in place.  So all of a sudden companies that chose not to hedge because they didn't feel currency having a meaningful impact on their business were caught feeling flat-footed and scrambling to get up to trade.  In addition -- started looking more extensively in option strategies that allowed them to obtain protection from the adverse moves while also giving them the benefit from advantageous move not market.  This has been particularly common in the rates market where we've seen increased interest in dollars, given the uncertain outlook, and some clients looking for the ability to participate in a downward market move higher, which is not entirely out of the question.

Also during periods when future currency movements aren't clear, options can help terms navigate short-term volatility without committing to fixed positions.  So essentially wherever clients kind of fall on this risk management spectrum, I think now is a great time to take another look at the approach and think about incorporating changes that could result in better outcomes.

>> DEAN:  Thanks, Stephanie.  This certainly seems complicated from my view.  Is this something your team is able to help with?

>> STEPHANIE:  Yeah, of course.  Our team is here to assist in that analysis and advise companies on structures that could be appropriate and that will align with their stated goals and risk tolerance.  So you know, clients should feel free to ask their RM's for an introduction to our team, their dedicated FX and rate specialists.

>> DEAN:  Excellent.  Glad to know that you're there to support.  Are there any best practices that you can share from your work with clients?

>> STEPHANIE:  Sure, Dean.  You know, my biggest piece of advice right now is to do something.  So this isn't the type of market where you want to be sitting on the side lines waiting to see what happens because before you know it, you'll be on the wrong side of the market wishing you would have been more proactive.  That doesn't necessarily mean people need to be places hedges on 100% of their forecasted FX exposures or lacking rate on the 100% of their outstanding floating rate debt.  But they should at least be looking to take some of that portion of risk off the table.  Maybe rather than hedging 80 to -- they are hedging 60 to 75%.  Or floating a fixed rate debt mix as a start or maybe considering using layered approach to hedges.  Start small and get more of a blended market rate.  These are just examples, and the ratios, of course, should be tailored to meet each company's specific needs.  But the key point here is not to leave the company entirely exposed to an adverse impact on profitability that could have otherwise been contained.

You know, for companies that haven't hedged in the past, I recommend they put in a risk management policy.  It's a document that identifies the objectives of a hedging program, the exposures, the strategies that are to be used along with the risk tolerance and have that signed off by senior leadership.  I can't stress the importance of this enough, as it acts as a blueprint, full, to managing risk and insures the company is working to achieve its stated long-term goals, not taking speculative positions in the market.

And finally, I think consistency is key.  All too often I see companies take a knee-jerk pause in their hedging programs when they are in a negative market to market position only to miss out on opportunities to lock in on a time when the market is most favorable to them.  So it's important to remember that hedging is a long-term strategy and should not be driven by short-term noise.

Particularly in this kind of environment with such high levels of uncertainty.  A consistent approach will help ensure the overall effectiveness of the company's risk management program.

>> DEAN:  Thank you, Stephanie.  And certainly appreciate all the work and the guidance you have provided to us.  Again, glad we brought back Jennifer.  What I will let you do and maybe -- we only have five to six minutes.  Maybe summarize, each of you, your key three take aways.  Maybe I'll start with you, Jennifer, to give Stephanie an opportunity to catch her breath.

>> JENNIFER:  Okay.  I'm going to state the obvious to expect the unexpected.  I think I said that earlier.  I think that's -- expect the unexpected.  Also, I think back to the last -- the last time we had Donald Trump in the oval office he put a lot of tariffs on $300 billion of goods, especially in China.  I think people expected that to go away when President Biden took over, that didn't.  In fact, President Biden took those tariffs and ran with them and put more on China.  So I think this whole protectionist sentiment, I don't think we can expect things to change from one administration to the next.  That's kind of my take-away as well.  One concern I have is that with all of this happening we've been using the word resilient a lot over the last few years, U.S. economy being very resilient.  I'm a little concerned that even though right now the economy is in very good shape, that resilience is going to be fading in the next year or two.

>> DEAN:  Thank you Jennifer.  How about you, Stephanie?

>> STEPHANIE:  So my first take-away is, as Jennifer said, plan for continued high levels of uncertainty and market volatility.  So you know, we view the uncertainty tax related to the outcome of the tariffs announced this weekend and being announced more broadly is very high right now.  We're only two weeks into this new administration.  We know there are plenty more policy changes to come.  Second, I will remind everyone that risk management is key.  With all these risks on the table, why not control the risks that you can through the use of FX and interest rate hedging?

Being strategic, having clear goals in mind and maintaining consistency will help companies attain the desired results with their program.

Finally, I think now is a great time to reassess and look at hedging strategies that could result in better outcomes.  In light of the current market environment I encourage companies to take another look at their hedging strategies and consider making just little to the ratio of cash flows hedge, tenors, and possibly including option structures in their risk management tool box.  Of course as I said before, our structuring team is here and happy to support our companies and our clients' efforts.

>> DEAN:  Thanks, Stephanie.  Would you don't mind indulging me, I do have a couple items that I like to discuss or at least promote.  This is a time to really look at other supply chains.  Why are we?

Maybe potentially looking at diversifying.  From both Canadian and US perspective, and look at what markets are acceptable to them. 

Second, you really do have to work with your bank and partners.  Not just your bank, but work with government agencies, make sure you stay on top of things and try to influence.  The third thing is also on industry associations.  They are certainly grade advocates.  They advocate for the particular businesses, and I think that is something that we have to continue doing.  So again, appreciate, and I want to thank you, Jennifer and Stephanie, for a timely and informative discussion and allowing me to ride along the roller coaster with both of you, thank everyone for joining us today.  As a follow-up you will receive an email from BMO with a link to a survey.  We will provide a link to a replay of this webinar that we do encourage you to share with your teams and colleagues that have missed.  It.  Lastly, this is a fluid situation, using the word fluid -- and changes are happening quickly as signaled by the U.S. administration.  We suggest reaching out to your relationship bankers for continued updates and guidance.  With that, have a great rest of your day.  Thank you.