Even before assuming the Presidency, Donald Trump is making it clear he’ll keep up his first term habit of disrupting markets at unexpected times. On Sunday, he posted on social media a threat to slap 100% tariffs on BRICS countries if they create an alternative reserve currency to the dollar. This was just days after announcing 25% tariffs on Mexico and Canada if they didn’t do more about controlling illegal migration and drugs entering the US.
Trade and tariffs have a direct impact on forex, since the main purpose for foreign exchange is to pay for goods and services crossing international borders. Generally, the ups and downs of currency pair prices respond in large part to the differences in interest rates, since that can cause large flows of speculative capital. However, those flows are ultimately dependent on the fundamental situation, which includes the trade relations between countries.
A Sign of What’s to Come
Given the impact of Donald Trump Tariffs on currencies, forex traders should probably get used to situations like this, as tariffs are expected to be a key policy tool of the Trump administration. We already have two examples of the current presidency, plus four years of the prior Trump White House, to figure out what to expect.
Though, one caveat is worth noting: Trump himself has insisted that his second term will not be like the first. Many of his supporters have expressed frustration that his more audacious proposals were blunted in his first stint in the White House. Reports have come from the transition team that Trump is looking to avoid that the second time around. His Cabinet picks, for example, show a larger contingent of core supporters as opposed to more “establishment” picks that populated his Cabinet the first time around. So, while it is the same person occupying the White House, he comes with a lot more experience this time around, which could change some of the way things are done.
The Carrot and the Stick
As for the first tariff incident that had a direct impact on Forex, Trump seems to be following a somewhat familiar playbook from his prior administration. Back in 2019, Trump threatened Mexico with 5% tariffs over illegal immigration. A week later, the two countries agreed enhanced border measures (the “remain in Mexico” policy), and the tariffs were never implemented.
Following last week’s threat of Donald Trump Tariffs on both of America’s neighbors, Trump has touted positive conversation with both Canadian Prime Minister Justin Trudeau and Mexican President Claudia Scheinbaum, though hasn’t gone to the point to say he’s satisfied with the immigration measures and therefore won’t implement the tariffs. But, that clearly seems to be the direction he’s going. The BRICs threat is likely to go in a similar direction, as Russia’s Foreign Minister Sergei Lavrov said that a BRICs currency idea was dead in the water.
What to Expect from the Markets
Markets appear far to be reacting to Trumps’ social media posts at face value, with both the loonie and peso dropping immediately after. Then the currencies have stabilized and recovered somewhat as the situation seems to be normalizing. Eventually, the market might catch on to this tactic, and the initial reaction might start to diminish.
In any case, Trump won’t be President for another two months. Any announcement he makes now has a “cool off” period to be resolved, and that’s why the market might not have such a strong reaction. But after January 20th, the larger market swings might come back.
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