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Trump tariffs bring US dollar and Japanese yen strength
John J. Hardy
Chief Macro Strategist
Summary: USD firms sharply on the back of the new Trump tariffs announced this weekend. Will there be a follow-on reaction if the tariffs go into effect tonight? Elsewhere, JPY strength is outpacing US dollar strength, showing that the JPY is dancing to a different drummer.
US President Trump made good on his tariff threats at the weekend, though the threatened tariff schedule doesn’t go into effect until just past midnight tonight, Eastern US time (so 0501 GMT tomorrow morning). With Trump vowing to hold calls with Canadian and Mexican leadership today, some perhaps are holding out the hope that, as with the recent showdown with Colombia recently on accepting flights with deportees, Trump is using the tariffs as a harsh negotiating tactic that he will back down from at the last moment. This hope is the only reason I can think of that USDMXN, for example, is only trading 1.7% higher than where it closed on Friday. If the Trump administration follows through with the 25% tariffs and keeps them there, Mexico will be thrown into an ugly recession and USDMXN will likely trade significantly higher still. Mexico is extremely sensitive to US demand for its exports as those exports are some 36% of Mexico’s economy and 77% of them are destined for the US. Canada is only slightly less exposed, with exports representing 33% of GDP and nearly 75% of those heading to the US. Canada has responded with contingent tariffs on over USD 100 billion on US imports should the Trump administration move ahead with its tariffs on Canadian products. Trump said that if Canada retaliates, he would double the tariffs.
The key test in the coming less-than-24-hours is whether the market has priced the current tariff schedule appropriately if the tariffs actually go into effect.
Elsewhere, the US dollar strength was mostly even-handed, with AUDUSD and EURUSD also punching to new lows for the cycle, although EURUSD suffered a spike in early Asian hours below 1.0150 that didn’t stick and the price action has mostly held in the 1.0225-50+ range as the market awaits what Trump has planned in the shape of EU tariffs. We can expect these will be forthcoming given he declared this weekend that they will “definitely happen” if on an unknown time scale. The imposition of anywhere near 25% tariffs on EU goods would likely have EURUSD challenging parity and beyond to the downside.
That leaves two key USD pairs that need discussing here: USDJPY and USDCNH. For the JPY, It appears that the carry angle on the Japanese yen is the overriding factor for now as the JPY has traded in negative correlation with global risk sentiment and even outpaced the US dollar by early European hours today, it seems for now trumping the risk to Japan’s economy if Trump’s tariff bazooka eventually points Japan’s way. EURJPY looks quit
Chart: USDCAD
USDCAD began more seriously pricing the risk of Trump tariffs by the close of trading on Friday and followed through higher on the tariff announcements at the weekend. The current sub 1% move (Friday close to current 1.4675 level) is less than modest when Trump’s 25% tariffs against Canada are a mortal threat to Canadian economic growth. The 1.4670-90 area, by the way, was a zone that was only reached twice since 2003, so we have traded to more than 20-year highs overnight. Will the pair follow through higher if the tariffs go into effect tonight at 0501 GMT?
US Treasury yields on watch
Elsewhere, it is interesting to note the reaction pattern in US treasury yields, with short yields backing up as the market prices lower odds of Fed rate cuts given the near-term risks to inflation from higher tariffs, while long-end yields were quite muted and even lower at the very long end of the curve – perhaps on the fears of the impact to growth. The lack of volatility there suggests long treasuries aren’t much of a safe haven offset to the weakness in risk assets.
Looking ahead, note that US Secretary of Treasury Scott Bessent is set to release the latest quarterly refunding plan on Wednesday that may make clear whether the treasury will issue more long-term debt than it did under Yellen in recent quarters. This after Bessent heavily criticized prior Treasury Secretary Yellen for issuing the Treasury issuing debt heavily at the sub 1-year time frame to avoid impacting longer US yields and mortgage rates up to the election.
Table: FX Board of G10 and CNH trend evolution and strength.
Note: the FX Board trend indicators are only on a relative scale and are volatility adjusted. Readings below an absolute value of 2 are fairly weak, while a reading above 3 is quite strong and above 6 very strong.
From here, if Trump follows through with the tariffs and they stick for some time, the pressure will likely continue on cross/JPY and the US dollar likely remains firm against nearly everything save for the JPY. If China continues to hold the line against CNH devaluation (note the 7.375 level in USD/CNH), this will keep a lid on volatility, which would expand dramatically were China to simply allow the rate to float. The Wall Street Journal ran a story citing people “familiar with the matter” that China will renew its pledge to not devalue the yuan to gain a competitive advantage.
One random question for GBP here – could Trump show the UK some favoritism due to his soft spot for the country and because it doesn’t have a notable trade surplus with the US? This clouds my otherwise bearish GBP outlook.
Table: FX Board Trend Scoreboard for individual pairs.
Key for US pairs is whether this USD move higher holds after the aggressive extension in Asian hours – it would be technically easy to create a reversal story if Trump suddenly backs down. Elsewhere, note EURCHF edging back lower on the EU tariff threats and collapsing EU yields since late last week. EURNOK is trying to get something going to the downside with the pop in oil prices (and possibly also on interesting internal political dynamics as the country is less likely now to adopt economically damaging EU rules on energy as the ruling coalition has split and the centre-right will likely win the next election with a more conservative and even libertarian coalition party, the surging Progress party). More to come there soon.