The first real shots of a global trade war were fired at the weekend, with President Trump levying 25% tariffs on Canada and Mexico, an additional 10% on Chinese goods and telling Europe that tariffs are ‘absolutely’ coming. The president will hold separate talks with Canada and Mexico today but the hopes for a last minute—or early—off ramp for these measures appear very dim, Scotiabank’s Chief FX Strategist Shaun Osborne notes.
Tariff action pushes USD to moderate in early trade
“The USD jumped, driving the MXN more than 2.5% lower at one point, and while the CAD has hit the lowest since the early 2000s, it is outperforming some of its peers. Japan has yet to fall under the tariff gaze of the White House, helping the JPY outperform broadly on the session—rising 0.3% on the day. Stocks are lower across the globe and bonds are firmer, outside of US Treasuries. The consequences of tariffs for the US economy and consumers may be significant.”
“Prices for basic goods are likely to rise sharply, construction costs will increase, auto prices may rise by $3000, according to some estimates. The auto sector may start to slow sharply and relatively quicky, given intricate North American supply chains. Higher inflationary pressures (helping keep US interest rates relatively firmer) and somewhat slower growth may result.”
“The DXY advanced strongly over the weekend but the index failed to reach the early January high above 110 and has traded well off the overnight high so far today. Markets may be thinking that the economic and market downsides of tariffs will make Trump rethink quickly but that might be an error. The longer tariffs persist, the firmer the USD is likely to trade.”
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