Trump tariff threats lead to volatility FX trading

Highlights

• Trump tariff threats lead to volatility FX trading.

• US unveils large import duties on Canada, Mexico.

• Risk assets sold-off sharply versus the US Dollar.

• Tariffs delayed by a month after last minute talks.

• China hit with 10% duties, effective on Tuesday.

• Markets not out of the woods - EU tariffs to come.

Excerpt below

We don’t think that it was necessarily the size of the trade levies that caught markets ill-prepared - these were heavily telegraphed prior to this week. Instead, it was perhaps both the hastiness at which they were imposed (these were planned to come into effect on 04/02) and the speed of the retaliatory response from authorities in Canada and Mexico.

Markets are far from out of the woods just yet, however, and investors shouldn’t lose sight of the fact that a delay to the tariffs is not the equivalent of a removal of the restrictions. In delaying the tariffs, Trump is providing authorities in both Mexico and Canada with time to make good on their promises, but there are no guarantees that the restrictions will be lifted even if they do so.

What we could have in store is a period of toing and froing, whereby Trump continues to dangle the threat of tariffs in order to achieve additional concessions.

This could result in no tariffs whatsoever or, a more likely scenario, where the trade restrictions may merely be toned down relative to his initial proposals. At the time of writing, the 10% tariffs aimed towards China, which were ‘live’ as of midnight on Tuesday morning, remain in place, so market participants would be remiss to be getting too carried away.

Assuming these restrictions are not revoked, we could still see markets fret over a slowdown in global growth, which may keep the safe-haven US dollar well bid at the expense of higher-risk currencies, particularly those with high exposure to China. News of any tariffs aimed at the European Union will now be key, particularly for the euro, given that the bloc relies on US demand for around 5% of its GDP.

The EU would almost certainly retaliate, and the threat of a full-blown global trade war remains very much on the table.