USD/CAD and USD/MXN Forecast: Trump Tariffs to Start this Weekend?

Trump Tariff Key Takeaways

• Trump announces he will enact 25% tariffs on Canada and Mexico and increase tariffs on China by 10% effective this weekend.
• Tariffs are likely to drive import prices higher, boosting inflation and potentially complicating keeping Fed interest rates higher for longer.
• With Canada’s (lame duck) Prime Minister Justin Trudeau vowing to counter U.S. tariffs, retaliation may be imminent – I discuss what it means for USD/CAD and USD/MXN below.

Trump’s Tariff Bombshell

The Trump administration has officially confirmed that new tariffs will take effect on Saturday, February 1, including a 25% tariff on imports from Canada and Mexico and a 10% tariff on Chinese goods. In an official briefing, White House spokesperson Karoline Leavitt denied speculation of a delay, reinforcing that these tariffs will be implemented in full on the US’s top three trade partners, though after the events of the past week, no policy is certain until it's officially signed and enacted.

Trade War Fears and Economic Implications of Tariffs

Trump’s decision is being framed as a response to a failure to crack down on illegal immigration by Mexico and Canada (in China’s case, they’re ostensibly attributed to illegal fentanyl trafficking), but many investors believe he wants leverage to renegotiate the USMCA trade deal that replaced NAFTA in Trump’s first term.

From a broad macroeconomic perspective, tariffs are likely to drive import prices higher, boosting inflation at a time when Trump rode a wave of dissatisfaction with rising prices under Biden back into the White House. Needless to say, rising consumer costs could also complicate the Federal Reserve’s path on interest rates, potentially keeping them elevated for longer.

Tariff Response: What’s Next?

With Canada’s (lame duck) Prime Minister Justin Trudeau vowing to counter U.S. tariffs, retaliation may be imminent; notably, almost 75% of Canada’s exports go to the US, amplifying the impact on the Canadian economy.

Markets should brace for intensified trade tensions, rapid shifts or potential gaps in the USD/CAD and USD/MXN exchange rates in particular, and uncertainty that could persist well into the coming months.

Canadian Dollar Technical Analysis: USD/CAD Daily Chart

Source: TradingView, StoneX

With no hint of a phased-in approach or exemptions announced, traders are selling first and asking questions later when it comes to the Canadian dollar and Mexican peso.

USD/CAD has seen an immediate spike higher to trade above 1.4500 as we go to press, on track for its highest close since the depths of COVID in March 2020. Bulls will want to see the breakout above the 1.4475-1.4500 zone hold into next week to confirm the breakout and open the door for further gains back toward the 22-year highs near 1.4700.

Mexican Peso Technical Analysis: USD/MXN Daily Chart

Source: TradingView, StoneX

Meanwhile, the peso has yet to break out to new yearly highs, though it has erased its intraday losses to trade back above 20.70. The pair remains within an ascending triangle pattern. For the uninitiated, ascending triangle patterns indicate growing buying pressure that most often leads to a bullish breakout and continuation higher, especially if we have a clear fundamental catalyst.

If we do see a clean breakout above 20.85, there’s little in the way of technical resistance until closer to 2021 highs around 22.00.

-- 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