Trump Tariffs: a taste of the next 4 years

• Trump threatens 25% tariffs on Canada, Mexico, additional 10% on China

• FXTM USDInd ↑ 0.6% before paring gains

• CAD, MXN weaken over 1% against USD  

• China’s offshore Yuan (CNH) slips to 4-month low

• Fed minutes & PCE report could move USD

In case you were unaware, foreign exchange markets buzzed with activity this morning!

FXTM’s USDInd jumped as much as 0.6% before paring gains while the Canadian Dollar, Mexican Pesos and Chinese Yuan weakened against the dollar.

• USDCAD touched a 4-year high at 1.4178

• USDMXN hit a 3-week high at 20.75

• USDCNH hit a 4-month high at 7.27

In addition…

• AUDUSD fell to 4-month low at 0.6434

• NZDUSD tumbled to 2024 low at 0.5797

Why are these currencies falling?

The tariff man is back.

President-elect Donald Trump vowed to impose large tariffs on major trading partners in posts to his Truth Social network on Monday.

Trump said he would impose 25% tariffs on goods entering the United States from Canada and Mexico, along with an additional 10% tariffs on Chinese exports.

Even though Trump did not mention Australia or New Zealand, their exposure to China exposed their respective currencies to downside risks.

What does this mean?

Trump's latest post on social media has given investors a taste of what to expect over the next 4 years, with developments around tariffs leading to potentially more market volatility. 

Renewed expectations over aggressive tariffs on Chinese imports along with Canada and Mexico may fuel concerns over rising inflation.

Rising inflation could see the Fed cut interest rates slower than expected – boosting the USD as a result.

But most importantly, this raises questions over Trump’s nominated Treasury security, Scott Bessent’s ability to adopt a more cautious approach to rolling out trade restrictions.

Global equities rallied in the previous session as markets saw Bessent as a market-friendly candidate. However, Trump tariff threats have triggered risk aversion with US equities pointing to a negative open.

By the way…

The next market-moving events could be the FOMC minutes published later today and the PCE report on Wednesday 27th November.

It’s worth noting that the November 6-7th FOMC meeting kicked off a day after the US election. So, no mention of the election results or the impact it could have on future policy is expected. Still, fresh clues on the Fed’s thinking beyond 2024 may impact the USD.

As covered in our week ahead report last Friday, the core PCE could influence Fed cut bets for December.

Traders are currently pricing in a 60% probability of another 25-basis point cut by December.

• Should the incoming risk events cool bets around a Fed cut in December, this may strengthen the USD.

• If the Fed minutes & PCE support the case for a Fed cut next month, the USD may weaken.