Market Wire: New Trump Trade Threats Hit Mexico and Canada

Donald Trump has threatened to hit all imports from Canada and Mexico with 25 percent tariffs on his first day in office, throwing currency markets into renewed turmoil and triggering sharp adjustments in the loonie and peso.

In a post on his social media platform, Truth Social, the president elect said, “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders. This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country! Both Mexico and Canada have the absolute right and power to easily solve this long simmering problem. We hereby demand that they use this power, and until such time that they do, it is time for them to pay a very big price!”. In a second post, he suggested that he would impose an “additional 10 percent Tariff,” on China “above any additional Tariffs, on all of their many products coming into the United States of America”.

Financial markets are backpedalling on hopes that the weekend appointment of Scott Bessent to Treasury Secretary might signal a more moderate approach to trade and fiscal policy setting. Equity futures are tumbling, Treasury yields are pushing higher, and the greenback is advancing against all of its major rivals.

The Canadian dollar is trading near a four-year low, down more than a full percentage point, while the Mexican peso is off by 1.75 percent. China’s yuan, sheltered by the People’s Bank of China, is pushing beyond the 7.6-percent level in offshore markets.

We suspect these moves will ultimately look overdone, with the cold commercial logic of international trade and domestic price pressures prevailing in reducing the tariff burden that actually reaches implementation. The measures proposed this evening could hit a number of strategic US industrial sectors hard, add approximately $272 billion a year to tax burdens, raise goods prices, lift interest rates, and sap strength in an already-vulnerable household sector. But for now, markets are likely to take shelter, with participants hedging themselves against further uncertainty. Volatility expectations are - quite justifiably - ratcheting higher across most major currency pairs, helping to boost the dollar in relative terms.