Saturday's announcement that Washington would go into full tariff mode against Mexico and Canada starting tomorrow has come as a surprise to FX markets. As recently as Friday afternoon, reports were circulating that tariffs would come into effect on 1 March – seemingly providing a month for Canada and Mexico to negotiate away the tariff threat. Instead, it looks like the 'maximum pressure' negotiating position of this new Trump administration is to tariff first, perhaps in an effort to get the best deal as quickly as possible, ING’s FX analysts Chris Turner notes.
“The trouble for investors, however, is that the off-ramp to these tariffs remains unclear. There have been remarks from President Donald Trump to the effect that there's 'nothing they can do' to avoid these tariffs. This points to a more substantial, permanent shift to a high tariff-low tax US economy and perhaps is consistent with the major report being asked of the US Commerce Department as to why the US runs large, perennial trade deficits. This report is due in April and could lead to universal tariffs.”
“The FX market reaction has unsurprisingly been a defensive rally in the dollar. The DXY gapped higher by a percent. The currencies most heavily hit were understandably the commodity currencies - those currencies that benefit from global growth. In fact, the New Zealand and Australian dollars have been hit harder than the Canadian dollar. Outperforming are the defensive Japanese yen and Swiss franc. This is also driven by the 2% fall in S&P futures - under pressure on the prospect that US supply chains will break and corporate profitability will be hit.”
“Unless Donald Trump surprises with a very last-minute de-escalation in tariffs (unlikely) expect DXY to stay bid near this year's high. Friday's benchmark revisions will probably be the best chance of DXY filling the overnight gap left down to 108.56.”
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