Yen Up, Trump Threatens Tariffs on Mexico, USMCA Approval in Doubt?


Asia Pacific Market Open Talking Points

  • Trump threatens tariffs on Mexico, throwing curveball on USMCA ratification
  • Sentiment collapsing, anti-risk Japanese Yen gaining, Mexican Peso depreciating
  • The Canadian Dollar held up well despite a significant decline in crude oil prices

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BREAKING NEWS: US TO IMPOSE 5% TARIFF ON ALL GOODS FROM MEXICO

The anti-risk Japanese Yen is gaining while the Mexican Peso is sinking in early Friday trade. US President Donald Trump announced the nation is going to impose a 5% tariff on all goods imported from Mexico come June 10. These levies are targeted at Mexico and are intended to curb illegal immigration, a key issue that the US President brought up during his 2016 Presidential campaign and will do so again. In addition, the US said that this tariff rate could increase to 25% by October 1 if the crisis persists.

Trade wars, especially between the US and China, have been a common theme in the markets causing volatility. For the North American region, this development crossed the wires just hours after welcoming USMCA remarks from the US and Canada (talked about later on in this article). This may throw a curve ball at ratification prospects since it must pass through US Congress.

Sentiment Sinks as Trump Threatens Tariffs on Mexico

Chart Created in TradingView

USD/MXN climbed more than 1.4% in the aftermath of these developments.

USD/MXN 30-Minute Chart

Yen Up, Trump Threatens Tariffs on Mexico, USMCA Approval in Doubt?

Chart Created in TradingView

Canadian Dollar Holds Up Despite Collapse in Crude Oil

Despite the roughly 4.5% drop in crude oil prices over the past 24 hours, the Canadian Dollar held up relatively well. It was the best-performing major. The Loonie tends to have a close relationship with the commodity due to Canada’s commodity-focused export sector. CAD spent the first-half of Thursday rallying before paring most of its gains during the US trading session.

Prior to Wall Street open, the Canadian Dollar rose with an uptick in sentiment after first quarter US GDP data was revised lower by less-than-expected. However, market confidence quickly deteriorated as the S&P 500 traded to the downside alongside US front-end bond yields. US recession fears increased as a key section of the US yield curve (10-year and 3-month spread) inverted further.

Sentiment-oriented crude oil prices unsurprisingly weakened, but that was compounded later by a smaller-than-anticipated contraction in inventories reported by the DOE. Oil prices broke through key support under 57.34, eyeing the next psychological barrier between 55.41 and 54.55. What seemed to then pause the decline in the Canadian Dollar were remarks from Canada’s Prime Minister and the US Vice President.

Justin Trudeau noted that he is confident in ratification prospects for the USMCA, the replacement to NAFTA. Mike Pence meanwhile reiterated that their goal is to ratify the deal in Congress this summer. The latter did talk about trade wars, noting that the US can “more than double” tariffs on China. Markets seemed to focus more on USMCA updates for the time being and the S&P 500 ended the day 0.21% to the upside.

This however could now be in doubt after the US threatening additional tariffs on Mexico, potentially opening up another trade war front.

Canadian Dollar, Crude Oil, S&P 500 and US Bond Yields on Thursday

Yen Up, Trump Threatens Tariffs on Mexico, USMCA Approval in Doubt?

Chart Created in TradingView

Friday’s Asia Pacific Trading Session

With that in mind, S&P 500 futures are little changed with a slight downside bias. It is unclear if Asia Pacific equities can find much upside follow-through and then sustain meaningful gains unless the path forward for US-China trade talks clears. Recently, Beijing has noted that it could resort to banning rare-earth exports to the US.

The Australian Dollar and ASEAN currencies will be looking at upcoming Chinese Manufacturing PMI data to gauge the health of the world’s second-largest economy. Signs of economic weakness, especially amidst the ongoing trade wars, can sink sentiment and potentially bode well for the anti-risk Japanese Yen. Given the proximity of the RBA next week, and with markets seeing a cut, volatility in AUD may be tamed.

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— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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