Trump tariffs bring US dollar and Japanese yen strength

US President Trump made good on his tariff threats at the weekend, though the threatened tariff schedule doesn’t go into effect until just past midnight tonight, Eastern US time (so 0501 GMT tomorrow morning). With Trump vowing to hold calls with Canadian and Mexican leadership today, some perhaps are holding out the hope that, as with the recent showdown with Colombia recently on accepting flights with deportees, Trump is using the tariffs as a harsh negotiating tactic that he will back down from at the last moment. This hope is the only reason I can think of that USDMXN, for example, is only trading 1.7% higher than where it closed on Friday. If the Trump administration follows through with the 25% tariffs and keeps them there, Mexico will be thrown into an ugly recession and USDMXN will likely trade significantly higher still. Mexico is extremely sensitive to US demand for its exports as those exports are some 36% of Mexico’s economy and 77% of them are destined for the US. Canada is only slightly less exposed, with exports representing 33% of GDP and nearly 75% of those heading to the US. Canada has responded with contingent tariffs on over USD 100 billion on US imports should the Trump administration move ahead with its tariffs on Canadian products. Trump said that if Canada retaliates, he would double the tariffs.

The key test in the coming less-than-24-hours is whether the market has priced the current tariff schedule appropriately if the tariffs actually go into effect.

Elsewhere, the US dollar strength was mostly even-handed, with AUDUSD and EURUSD also punching to new lows for the cycle, although EURUSD suffered a spike in early Asian hours below 1.0150 that didn’t stick and the price action has mostly held in the 1.0225-50+ range as the market awaits what Trump has planned in the shape of EU tariffs. We can expect these will be forthcoming given he declared this weekend that they will “definitely happen” if on an unknown time scale. The imposition of anywhere near 25% tariffs on EU goods would likely have EURUSD challenging parity and beyond to the downside.

That leaves two key USD pairs that need discussing here: USDJPY and USDCNH. For the JPY, It appears that the carry angle on the Japanese yen is the overriding factor for now as the JPY has traded in negative correlation with global risk sentiment and even outpaced the US dollar by early European hours today, it seems for now trumping the risk to Japan’s economy if Trump’s tariff bazooka eventually points Japan’s way. EURJPY looks quit

Chart: USDCAD
USDCAD began more seriously pricing the risk of Trump tariffs by the close of trading on Friday and followed through higher on the tariff announcements at the weekend. The current sub 1% move (Friday close to current 1.4675 level) is less than modest when Trump’s 25% tariffs against Canada are a mortal threat to Canadian economic growth. The 1.4670-90 area, by the way, was a zone that was only reached twice since 2003, so we have traded to more than 20-year highs overnight. Will the pair follow through higher if the tariffs go into effect tonight at 0501 GMT?