Trump Announces Tariffs on Canada, Mexico, and China; USD/CAD Refreshes Multi-Decade High

Trump Announces Tariffs on Canada, Mexico, and China; USD/CAD Refreshes Multi-Decade High

Over the weekend, newly elected US President Donald Trump pushed through on his pledge to impose tariffs on foreign goods imported into the United States (US). He announced that the tariffs would amount to a 25% duty on goods from Canada – America’s largest trading partner (this will also include 10% on Canadian energy imports) – and Mexico, as well as an additional 10% on imports from China. 

Via his Social Media Platform – ‘Truth’ – Trump commented that while Americans could experience some ‘pain’ after implementing tariffs, he added: ‘Anybody that loves and believes in the United States of America is in favour of Tariffs. They should have never ended in favour of the Income Tax System in 1913. The response to Tariffs has been FANTASTIC’!

The financial markets responded as expected, with opening gaps across key markets overnight. This will likely overshadow most macroeconomic prints this week, with any related headlines likely to elevate volatility. Along with global Stock markets taking a hit, Digital Currencies also traded lower – note that BTC/USD (Bitcoin versus the US dollar) punched back under US$100,000 to shake hands with range support from US$91,591. At the same time, US Treasury yields and the US dollar (USD) rallied higher. 

For now, the UK seems out of the firing line regarding tariffs. Speaking from Maryland on Sunday, Trump commented that the UK takes little in terms of US imports and is ‘way out of line’. Nevertheless, he stopped short of threatening tariffs and thinks the imbalance can ‘be worked out’. In terms of the European Union (EU), Trump noted that it is an ‘atrocity what they have done’ and said ‘something is going to take place’. Officials in the EU, however, have been clear that they are prepared to retaliate.

Why is Trump Imposing Tariffs?

First and foremost, it is important to understand that the said tariff announcement will not come into effect until tomorrow and will apply to a broad range of goods. However, Trump is expected to hold talks with both Canada and Mexico today. Therefore, deals could still be struck before the deadline. 

According to Trump, the primary drivers behind his administration’s implementation of tariffs are curbing trade deficits – when a country imports more than it exports, resulting in a negative trade balance – immigration and the flow of drugs.

Economists warned that tariffs could influence geopolitics, increase inflation, cause job losses, and weigh on growth (GDP – Gross Domestic Product). You may recall that year-on-year (YY) headline US CPI inflation (Consumer Price Index) rose by 2.9% for the third consecutive month in December 2024, while YY core CPI inflation has averaged around 3.2% since mid-2024.

What am I Watching?

The USD/CAD (US dollar versus the Canadian dollar) is an interesting currency pair to monitor, with the USD/MXN (US dollar versus the Mexican Peso) and USD/CNY (US dollar versus the Chinese yuan) also worth watching. 

As evident from the USD/CAD’s daily chart below, the pair jumped 1.3% at the open and clocked a fresh multi-decade high of C$1.4793. This had the pair cruise through the upper range edge of C$1.4467, and clear offers from resistance from C$1.4661. Although we may still ‘fill the upside gap’, C$1.4661 might offer support, with the next layer of long-term resistance not expected to make a show until as far north as C$1.5128. Of note, implied volatility for the CAD is trading at its highest levels not seen since 2022, with positioning indicating a strong downside bias in the COT data (Commitment of Traders); large speculative short positions are at their lowest since 2018. 

If an agreement were to be reached between the US and Canada, and Trump pulled back on tariffs, this would trigger a correction in the USD/CAD, driving the price back through C$1.4661 to at least the upper edge of the breached range. Given positioning and implied volatility, this would likely be a sizeable move to the downside. On the other hand, threats of further tariffs based on poor communication between the two countries, for example, would likely underpin the current bid in the pair.

There is not much to add to the US Dollar Index other than it moved as expected. 

You may recall that I highlighted a possible recovery in the USD here and the Index has since touched both monthly and daily resistances from 109.33 and 109.53, respectively. 

Should further upside materialise on the back of tariffs, the next upside objective rests around the 110.18 peak formed on 13 January.

Charts created using TradingView

Written by FP Markets Market Analyst Aaron Hill

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