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
4 itemsJPY upside risks
The desk sees potential upside risks for the Japanese yen (JPY) as the US dollar (USD) faces renewed pressure from trade tariff threats. Per the full note from MUFG EMEA, the USD's year-to-date weakness is linked to President Trump's pragmatic tariff approach, but this may shift with impending tariffs on Canada and Mexico. The Bank of Japan's (BoJ) more hawkish stance further supports the yen's outlook, suggesting a potential for gains ahead. This evolving landscape highlights the need for traders to monitor both US trade policy and BoJ rhetoric closely.
Trump tariff delay triggers correction lower for USD?
The desk interprets President Trump's recent tariff delay as a catalyst for a potential correction lower in the USD, suggesting that trade policy decisions are increasingly influencing currency valuations. Per the full note from MUFG EMEA, the FX market is reacting to these developments, particularly in relation to the pound following the Bank of England's latest policy update. The desk notes that the current positioning may favor a weaker USD if trade tensions ease, as traders reassess risk sentiment. With no immediate high-impact events on the calendar, market participants may focus on upcoming economic data releases for further direction.
Reciprocal tariff plans are not fully priced
The desk anticipates that the US dollar's recent weakness against G10 currencies may not fully reflect the potential ramifications of the upcoming reciprocal tariff announcement on April 2nd. Per the full note from MUFG EMEA, Derek Halpenny highlights that market sentiment could be overly optimistic regarding the impact of these tariffs, suggesting that traders should brace for possible volatility. As positioning shifts ahead of this key event, the desk sees a cautious approach as prudent, especially given the lack of high-impact events on the calendar in the near term.
The BoJ, yen and Trump’s tariff announcement
The desk anticipates that the upcoming tariff announcement from President Trump could significantly impact FX markets, particularly the Japanese yen. Per the full note from MUFG EMEA, the Bank of Japan (BoJ) faces pressure to adjust its monetary policy in response to rising inflation, which could lead to a potential rate hike. With inflation in Japan reported at 3.0% in September, higher than the BoJ's target, the market is closely watching for any signs of policy shifts. Our consensus target for USD/JPY is 1.075, reflecting a cautious yet optimistic outlook amid these developments.
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