Tariff Truce Before the Trade War Even Starts? USD/CAD and USD/MXN in Focus

Trump Tariff Key Takeaways

• Over the weekend, US President Trump signed the order to enact 25% tariffs on Canada and Mexico and 10% tariffs on China effective at 12:01am on Tuesday. Canada has vowed retaliation.
• Trump and Canadian Prime Minister Trudeau spoke this morning and are poised to speak again this afternoon, suggesting that productive conversations are taking place.
• USD/CAD and USD/MXN are pulling back after hitting multi-year highs – where next?

Trump Fires First Shot in Potential Global Trade War

He actually followed through with it…or did he?

Over the weekend, US President Trump signed the order to enact 25% tariffs on Canada and Mexico and 10% tariffs on China effective at 12:01am on Tuesday. Canada has already announced retaliatory tariffs of its own, raising the specter of an ever-expanding global trade war kicked off by this weekend’s decision.

Traders clearly expected some form of delay or staggered implementation, and as a result of this near worst-case announcement over the weekend, we’ve seen the US dollar rallying against almost all its major rivals while major indices and other risk assets have fallen precipitously.

Signs of Progress Toward a Tariff Truce?

As US traders scrutinize this morning’s headlines though, they can squint and see some reasons why the trade war may be short-lived. Ahead of the US open, the White House Director of the National Economic Council, Kevin Hassett, went on CNBC and offered a more nuanced outlook toward the tariffs, stating in part:

“President Trump is going to decide all of this, you know, at a time that he chooses. But there are positive conversations that have happened over the weekend, and there are positive conversations that are going to happen between the leaders of these countries, you know, over the next hours. And President Trump will then see what people have to offer and then make the call. “

As we go to press, we’ve gotten confirmatory headlines that Trump and Canadian Prime Minister Trudeau spoke this morning and are poised to speak again this afternoon, suggesting that productive conversations are taking place and raising hopes of a delay or reduction in the scheduled tariffs later this week.

Markets are seemingly reacting to these positive headlines, with US indices bouncing ~1% off their overnight lows and the US dollar reversing about half of its opening gaps higher in early US trade. Regardless of what happens, elevated volatility is likely to remain in place throughout the week, if not longer.

Canadian Dollar Technical Analysis: USD/CAD Daily Chart

Source: TradingView, StoneX

It’s not every day, or even every decade, that you see a currency pair move to 20+ year highs, but that’s exactly what USD/CAD traders got when markets reopened from the weekend. USD/CAD surged nearly to 1.2800 before coming off the boil, and as of writing, the pair is trading just incrementally below the 22-year high in the 1.4690 area. If there is a truce is the budding trade war early this week, that may mark the near-term top for the pair, but if the tariffs are instituted as currently scheduled and remain in place for any meaningful amount of time, USD/CAD could confirm the breakout and make a run toward 1.5000 later this month.

Mexican Peso Technical Analysis: USD/MXN Daily Chart

Source: TradingView, StoneX

USD/MXN saw a big breakout of its own when markets reopened for this week’s trade, blasting through resistance at 20.85 to hit a nearly 3-year high near 21.30 before retracing amidst the potentially optimistic headlines above. That said, USD/MXN is currently still trading above previous-resistance-turned-support at 20.85, keeping the bullish bias intact pending new developments on the trade war front.

For what it’s worth, the Trump Administration seems more encouraged by the steps Mexico has taken to address its concerns than Canada, potentially limiting the upside in USD/MXN if the US’s southern neighbor is given preferential treatment.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX