Trump tariff policy injecting volatility into FX market

USD: Another tariff u-turn from President Trump provides relief

It has been a volatile start to the week in the FX market after President Trump performed a last minute u-turn and delayed the implementation of 25% tariff hikes on Canada and Mexico by one month. Unfortunately, China was not so lucky with the further 10% tariff hike taking effect overnight. The decision to delay tariff hikes against Canada and Mexico has resulted in significant relief rebounds for the Canadian dollar and Mexico peso. After hitting a high yesterday at 1.4793, USD/CAD has since fallen back towards the 1.4400-level where it was trading towards the end of last week. Similarly, USD/MXN has fallen back towards recent lows between 20.000 and 20.500 after briefly hitting a high yesterday of 21.293. The Chinese renminbi has also rebounded even though the 10% tariff hike came into effect overnight. USD/CNH has fallen back from a high yesterday of 7.3734 although it continues to trade above the 7.3000-level.  The US dollar has softened more broadly as well reflecting relief that a wider trade war has been avoided for now. A clear pattern is now emerging after President Trump threatened but then failed to follow through with imposing tariffs on Colombia, Canada and Mexico at the start of his second term.

It indicates that the threat of tariffs is being used more as a negotiating tool to gain leverage over trading partners rather than an end goal perhaps with the exception of China who he already has a clear record of implementing tariff hikes during his first term as president. President Trump has claimed that the tariff hike threats were successful in helping to tighten border control at the northern and southern borders. After a call with Canadian Prime Minister Trudeau he posted that Canada will implement their CAD1.3 billion Border Plan including reinforcing the Border with “choppers, technology and personnel, enhanced coordination with the US, and increased resources to stop the flow of fentanyl. Nearly 100,000 frontline personnel are, and will be, working on protecting the Border. In addition, Canada is making new commitments to appoint a Fentanyl Czar”. It is not exactly clear what it was exactly that changed his mind to suspend tariff hikes for 30 days as the Canadian government had previously announced the CAD1.3 billion Border plan in December. The 30 day delayed implementation of the tariffs will allow President Trump to “see whether or not a final Economic deal with Canada can be structured”. It suggests that the next stage of negotiations will focus more on addressing Canada’s trade relationship with the US.

Similarly, President Trump agreed to pause tariff hikes on Mexico after speaking with President Sheinbaum who “agreed to immediately supply 10,000 Mexican soldiers on the Border. These soldiers will be specifically designated to stop the flow of fentanyl, and illegal migrants into our country”. He stated that negotiations will take place over the next 30 days headed by Secretary of State Macro Rubio, Secretary of State Scott Bessent, and Secretary of Commerce Howard Lutnick, and high-level Representative of Mexico to achieve a “deal” between our countries which is again likely to focus more on the trading relationship between the US and Mexico. 

In contrast, China has hit back immediately by imposing tariffs on a range of US imports and announced a probe into Google after President Trump imposed a further 10% tariff hike overnight. The measured response from China included tariffs on US oil, LNG and agricultural machinery, export controls on rare-earth minerals and an expanded entity list. 15% tariffs have been imposed on US coal and liquefied natural gas and a 10% tariff on oil and agricultural equipment. Overall, the measures are relatively modest. Bloomberg has highlighted that US exports of oil to China accounted for only around USD6 billion in 2024 which compares to the USD525 billion of Chinese goods affected by the 10% tariff hike imposed by the US. It suggests that China is wary of pushing back to hard against Trump’s latest tariffs and is leaving the door open for future negotiations. As we have highlighted previously, the 10% tariff hike could just be the first step of a series of tariff hikes for China after President Trump threatened to raise tariffs as high as 60%. The risk of further disruption to trade between the US and China continues to support our outlook for a weaker renminbi in the year ahead and negative spill-overs for other Asian and commodity-related currencies. 

On the other hand, the decisions to delay tariff hikes for Canada and Mexico makes us more cautiously optimistic that President Trump will ultimately stop short of implementing aggressive tariff hikes against US allies. The US, Canadian and Mexican auto sectors are closely interlinked and the tariff hikes would have been highly disruptive for the US as well. Nevertheless, the continued uncertainty over trade policy even if tariff hikes are not implemented is still a headwind for trade and investment in the region. President Trump has also threatened to impose tariffs on the EU “pretty soon”. While there is more optimism now that he will not back up his words with actions, it remains to be seen how negotiations work out between the EU and Trump. The lingering uncertainty is likely to contribute to the euro continuing to underperform in the near-term. In contrast, President Trump has expressed more optimism that a deal can be “worked out” with the UK to avoid tariffs. Alongside the UK’s higher share of services exports to the US, President Trump’s comments have helped to drag down EUR/GBP back closer to last year’s lows between 0.82000 and 0.8300.            

TARIFF HIKE ON CHINA POINTS TO FURTHER CNY WEAKNESS

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
UK	10:00	5-Year Treasury Gilt Auction	--	--	4.490%	!
US	13:55	Redbook (YoY)	--	--	4.9%	!
US	15:00	Durables Excluding Defense (MoM)	Dec	-2.4%	-2.4%	!
US	15:00	JOLTS Job Openings	Dec	8.010M	8.098M	!!!
US	15:10	IBD/TIPP Economic Optimism	Feb	53.0	51.9	!
US	16:00	FOMC Member Bostic Speaks	--	--	--	!!
US	18:15	FOMC Member Daly Speaks	--	--	--	!!
NZ	21:45	Employment Change (QoQ)	Q4	-0.2%	-0.5%	!
NZ	21:45	Labor Cost Index (YoY)	Q4	3.0%	3.4%	!
AU	22:00	Services PMI	Jan	50.4	50.8	!
JP	23:30	Average Cash Earnings (YoY)	--	3.6%	3.0%	!

Source: Bloomberg