Tariff war 2.0 and its implications for USD/CAD and USD/MXN exchange rates

How the reintroduction of tariffs could shape the USD/CAD and USD/MXN currency pairs, reflecting historical patterns and economic uncertainty

The return of Donald Trump to the White House has once again rekindled trade tensions with Canada's and Mexico's economies, especially by imposing tariffs. This renewed "Tariff War" between the U.S. and its North American neighbours has already started to send ripples through the exchange rates of USD/CAD and USD/MXN, offering investors a potential preview of a turbulent period for these currency pairs.

On February 1, 2025, Trump announced a new round of tariffs — a 25% duty on goods imported from Canada and Mexico — pushing the USD/CAD to an unprecedented 1.45 and USD/MXN to 20.64. This mirrors the dynamics witnessed during his first term in 2018 when trade disruptions caused significant volatility in these currencies.
In 2018, Trump's imposing a 25% tariff on steel and 10% on aluminium, initially excluding Canada and Mexico, led to a mild rise in the USD/CAD from 1.28 to 1.29, while USD/MXN saw only moderate fluctuations. However, as exemptions expired in June 2018, Canada and Mexico retaliated with their own tariffs, causing USD/CAD to surge to 1.34 and USD/MXN to 20.5. These price movements were amplified by the uncertainty surrounding trade negotiations, which remained a key catalyst for the volatility in these pairs.

With the recent tariff announcement, a repeat of 2018's currency behaviour appears increasingly likely. Investors and traders need to closely monitor key levels, such as the USD/CAD resistance zone at 1.4595, which may lead to further price action towards 1.4710. Similarly, the USD/MXN pair could spike toward 21.14, possibly reaching 22.17, reflecting the escalating uncertainty.

The U.S. dollar's bullish momentum against both the Canadian and Mexican currencies, already apparent in the previous months, is likely to gain further momentum. The USD/CAD, in particular, has shown a strong upward trend since October 2024, with January 2025 closing above the 1.4513 zone, setting the stage for possible resistance at the previous 1.4595 level. Meanwhile, USD/MXN's consistent bullish run since April 2024 is also at risk of further acceleration due to the new tariff impositions.

While the tariffs have already triggered immediate market reactions, the long-term outlook for both pairs hinges on trade negotiations between the U.S., Canada, and Mexico. Should the trade dispute intensify, further price action and increased volatility could be expected, making it imperative for traders to monitor developments closely.

In conclusion, the re-emergence of Trump's tariff policies could once again inject substantial volatility into the USD/CAD and USD/MXN currency pairs. With the potential for further escalations in the trade war, traders must stay alert to critical price levels and the broader economic implications of these geopolitical tensions.

USD/CAD H4 price chart  Feb 2, 2025

USD/MXN daily price chart Feb 2, 2025