Trade tariffs – will he, won’t he? USD swings ahead
At a Glance
The desk anticipates significant volatility in the USD as the implementation of a 25% trade tariff on Canada and Mexico looms, a move that could exacerbate market tensions and impact cross-border trade dynamics. Per the full note from MUFG EMEA, the potential for President Trump to proceed with these tariffs could lead to a stronger USD in the short term, particularly against the CAD and MXN. The desk notes that the Federal Reserve's recent policy stance, coupled with the ECB's upcoming decisions, adds further complexity to the FX landscape. With no major events on the calendar in the next month, traders should remain vigilant as market sentiment shifts in response to these developments.
Key Takeaways
- 0125% tariffs on Canada and Mexico could drive USD volatility.
- 02Central bank meetings add layers of complexity to FX dynamics.
- 03Market positioning anticipates significant swings in response to trade policies.
Full Analysis
What the desk is arguing
The looming implementation of a 25% trade tariff on Canada and Mexico represents a critical inflection point for USD pairs in the FX market. The anticipation surrounding President Trump's approach to trade policy is likely to induce significant swings in currency valuations, especially against the CAD and MXN.
Moreover, the current week is not just about tariffs; attention is also on the Fed and ECB meetings. The resulting environment could enhance USD strength in the short term, especially if either central bank signals a more hawkish stance, overshadowing potential downside from trade policies.
Where it sits in our coverage
Our consensus target for USD/CAD stands at 1.075, with a firm spread between 1.04 and 1.12. This perspective aligns closely with MUFG's analysis, which anticipates significant currency movements due to tariff implementation and central banking decisions.
In the context of our coverage, notable targets include: - JPMorgan: Target of 1.10 for Mar-26 - Barclays: Target of 1.08 for Mar-26 - Citi: Target of 1.05 for Mar-26
How other firms see it
Goldman Sachs holds an aligned stance, endorsing a more bullish outlook for the USD/CAD in light of anticipated market reactions to tariffs. Conversely, BofA presents a contrary view, advocating for a bearish perspective with a target set at 1.04, suggesting reservations about the tariff's effectiveness impacting the USD positively.
- Goldman Sachs: Aligned stance, bullish target
- BofA: Contrary stance, bearish target
Market Implications
The tariff implementation is expected to heighten Forex market volatility, particularly in USD/CAD and USD/MXN pairs. Traders should prepare for potential sharp movements that could arise from any surprises in monetary policy announcements from the Fed and ECB, which may further influence risk sentiment in the market.
From the original
This week draws to a close with a 25% trade tariff set to be implemented on Canada and Mexico. Derek Halpenny, Head of Research Global Markets EMEA & International Securities talks to Jack Greenslade, UK, Ireland, Swiss & ME FX Sales, about the FX implications of Trump going ahea
Related speeches
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Recent developments in U.S.-Canada trade relations suggest a significant potential impact on the U.S. consumer market, particularly with potential tax increases on imported Canadian goods. Per the full note from UBS, a new proposed tax of 35% could apply to a broad array of Canadian products, despite previous concessions made by Canada on digital taxes. This situation underscores the unpredictability of U.S. trade policies under the current administration, which often creates uncertainty for market participants and raises questions about the effectiveness of trade negotiations. The current state of equity markets suggests a belief that any such tariffs would be rolled back, but conflicting signals exist as commodities like oil— crucial for the U.S.— face ongoing tariff ambiguity. Overall, the likelihood of retreat from these proposed tariffs is high, given the historical context and market reactions.
Top of the Morning: The week in review and preview
The desk interprets recent developments in U.S. trade policy as pivotal for market sentiment, particularly in equities, which could influence currency flows. Per the full note [source], President Trump's extension of the tariff pause until August 1st suggests ongoing negotiations, but the immediate threat of new tariffs on various trading partners could heighten volatility. This context is vital for FX markets as traders assess the implications for cross-border trade dynamics. The prospect of new tariffs, including significant levies on Brazilian imports, may drive currency fluctuations in emerging markets in particular, while U.S. equities remain sensitive to tariff-driven headlines.
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