Mexico and Canada have now gone through the preliminaries and started their first round of negotiation battles with President Donald Trump. China, which is currently talking with the White House administration, appears to be looking for a gentler path. China has gone through this before with Trump, so it knows what to expect as it enters its second trade confrontation.
What are the countries trying to do, and what will be the likely or possible results for the market going forward?
Trump: Truth or Consequences
US President Trump has threatened to hit a wide array of imports with tariffs ranging from 25% to 10% hikes. Manufacturers like computing, pharmaceuticals, machinery, some food staples, and resources that the U.S imports all could be affected. However, specifics remain in short supply and because negotiations continue, rhetoric could morph into new threats or alternatively tariff threats could be defused.
While some economists see the threat of inflation if tariffs are imposed, the potential outcome is hard to quantify. Bluster is part of the tariff rhetoric from all sides. Some believe tariffs will not cause massive increases in consumer prices. When China was hit by trade sanctions under the first Trump administration, prices did not spike.
The potential consequences of fear generated from not negotiating with President Trump were quickly seen on 3rd February 2025 in the reaction of financial institutions. The selloff on Wall Street also highlighted the potential of tariffs to cause economic pain for corporations. However, a lot of the fear generated in the financial markets was and is based on emotion rather than hard calculations.
Fast Gaps Higher as Forex Markets Reacted to Trump
The USD/CAD and USD/MXN both saw vivid bullish price action on 3rd February 2025 as the US tariffs were confirmed on Mexico and Canada. The resulting price gaps higher as the market opened were greeted with surprise from many. However, we have seen this show before. Trump’s decision to go ahead with tariffs the previous day sparked USD buying across Forex markets as financial institutions came online, but by Monday afternoon U.S time the buying of USD impetus stopped. This is because Mexico, led by President Sheinbaum, and Canada led by outgoing Prime Minister Trudeau, spoke to the White House and began to negotiate. This was certainly President Trump’s real objective.
USD/CAD Price Chart September 2024 – February 2025
The trend in the USD/MXN has been bullish since the Morena political party increased its majority in the Mexican elections late in the spring of 2024. Until then the Mexican Peso had been one of the better performing currencies against the USD for almost two years. The upwards trend in the USD/MXN since late spring 2024 had seen highs continue to be tested for the past six months. February’s early rush of buying was noteworthy, but it happened not only because of Trump’s tariff rhetoric, but because financial institutions are not optimistic about Mexican economic policy and Mexico’s fiscal outlook which had been creating bullishness in the USD/MXN even before Trump won the November 2024 election.
USD/MXN Price Chart September 2024 – February 2025
As for China, Trump threatened and did hit China with trade sanctions during his first term in the White House. While most of the world sees Trump’s action as a political ploy using economic warnings about perceived unfair trade to get leverage and help expand U.S dominance, Trump is selling the tariffs to the American public as a way to stop the flow of dangerous drugs into the U.S. The anti-drug chorus is helping Trump find support in the U.S even from opponents, this because it is not smart to go against anti-drug policy if you want to remain in political office.
How Will Trump’s Tariff Dispute Likely Affect the Forex Market?
China, Mexico and Canada all have something to lose economically if they do not negotiate with the White House. Financial institutions showed their lack of confidence in the Mexican Peso and Canadian Dollar on Monday when both currencies lost value with fast velocity as markets opened. However, Trump quickly brought Mexico and Canada to the table, and the USD/CAD and USD/MXN have recovered all their lost ground from early February and are now near intriguing near-term support ratios.
- Financial institutions now need to decide how much premium risk had been factored into the Mexican Peso and Canadian Dollar. There may be more short-term opportunities for traders looking for optimism and continuing increases in these currencies, but caution – a lot of it – is needed. This because economic policies from Mexico and Canada are still under the domain of questionable fiscal mandates.
- The USD has issues regarding U.S debt levels and spending policies, but Trump does seem to have the confidence of financial institutions for now. There may still be opportunities to profit from long USD positioning throughout the remainder of Q1 2025 and possibly into Q2.
- Short and near-term sentiment will still be affected by more rhetoric from the White House. Apart from China, Mexico and Canada, others like the European Union will certainly come into the spotlight too. Trump may hit the Euro hard too (short EUR/USD) when he begins to issue concrete threats of tariffs against the Eurozone.
Trump may be disliked by many, but people should not discount his ability to speak loudly and deliver actions. Trump sees political and economic circumstances through the lens of his business upbringing, this is not about to change, negotiation is Trump’s mantra.
