USD flows: Mixed tariff bag, some relief for Canada and Mexico, Japan and EU hit
The Trump tariff announcement is a mixed bag, with some relief for Canada and Mexico but aggressive action on Japan and the EU, as well as several developing nations. The net impact is probably not much off expectations for the US economy, which will face somewhat higher inflation and somewhat slower growth, but the country mix is seeing some contrasting reactions on FX rates.
There is a minimum baseline of 10% though items exempted from tariffs in early March from Canada and Mexico due to compliance with the USMCA will remain exempt. While a 25% auto tariff will hurt both Canada and Mexico the CAD and MXN are seeing some relief, and with Canada and Mexico both major trading partners this reduces downside economic risks for the US. This also reduces the risk of Canadian retaliation, though Canadian PM Carney will respond on Thursday. China however faces a 34% tariff, while Japan’s 24% rate may have surprised some given that Japan has not been a major target of Trump’s rhetoric. USD/JPY has led USD weakness, but this also reflects pressure on equities and UST yields.
UST yields are lower on what looks like a justified expectation of US economic weakness, if not dramatic, though the tariffs look sure to lift inflation and that raises questions on Fed easing bets. While Trump was talking, Fed’s Kugler started that the Fed should hold rates as long as upside inflation risk continue. Lower (10%) tariffs on the UK than the EU (20%) has seen GBP/USD marginally higher and EUR/USD marginally weaker, though EUR/GBP remains above last week’s lows. How Japan and the EU respond will be closely watched. An EU response has already been scheduled at 03:00GMT.