Market Brief: New Tariff Threats Add to Unease

The US dollar is up only slightly against its peers this morning after Donald Trump said tariffs on Canada and Mexico are “going forward on time, on schedule”. Speaking with reporters after yesterday afternoon’s meeting with French president Emmanuel Macron, Trump claimed the United States had been “led, in some cases, by fools," saying “I look at some of these [trade] agreements, I’d read them at night and I’d say, ’Who would ever sign a thing like this?’ So the tariffs will go forward, yes, and we’re going to make up a lot of territory… Our country will be extremely liquid and rich again”.

After a series of reversals, climbdowns, and symbolic “deals”, traders simply don’t believe Trump will follow through on his threats. We suspect that—despite public protestations to the contrary—many officials, including Scott Bessent and Howard Lutnick, are working behind the scenes to outline the negative impact that big tariffs could have on the US economy, and are seeking to direct Trump’s attention elsewhere. Indeed, a report published shortly after the president’s interview suggested that he “misspoke,” with no decision having yet been made with respect to the 25-percent levies that could be applied against imports from Canada and Mexico. The Canadian dollar and Mexican peso are each down by less than a quarter percentage point, and measures of implied volatility remain surprisingly low around next week’s deadline.

This could be the wrong bet. It’s possible that observers—ourselves included—are guilty of seeing a more complex set of motivations behind Trump’s threats than actually exists. An article published by Bloomberg last Friday suggested that the president may truly see tariffs as a revenue-raising tool, meaning that the focus other administration officials have been placing on trade imbalances, fentanyl shipments, and migration issues may be distracting from the truth. If so, Canada, Mexico, China, and the European Union could get hit the hardest by dint of the fact that they provide the biggest denominators—the largest import volumes—on which to base tariff calculations.

More broadly, investors have pivoted away from expecting the Trump administration to deliver a significant boost to growth, and are instead worrying about the damage that tariffs, government layoffs, tighter immigration, weaker regulation, and sheer unpredictability could inflict on the economy. Measures of sentiment among consumers and businesses have plunged in recent weeks, and surprise indices—which measure the difference between forecasts and realised economic data—have slipped back into negative territory. Equity markets are losing steam, ten-year Treasury yields are holding near two-month lows, and the dollar is now the worst-performing major currency on a year-to-date basis.

Spirits could weaken further in the next day and a half. Signs of weakness in this morning’s Conference Board consumer confidence survey—or in tomorrow’s earnings guidance from Nvidia—might push investors further into a defensive stance, putting downward pressure on yields and flows into American capital markets.

But we would also caution against extending the shift in narrative too far. Inflation is still subsiding, American consumer balance sheets remain strong, business investment is holding up, asset values are near record highs, and financial conditions are incredibly loose. Trump’s bluster on tariffs hasn’t translated into meaningful action, and Elon Musk’s attempts at cutting the government’s salary bill aren’t likely to materially reduce the flow of money into the economy.

We’re sticking with our bearish view on the dollar for the year ahead (which was somewhat contrarian when published in December), but we also don’t expect to see a smooth downward trajectory playing out. Temporary periods of strength are likely as the economy demonstrates surprising resilience and new tariff threats come and go. As such, corporate treasuries would be wise to consider keeping tail risk protection in place—particularly in currencies like the Canadian dollar and Mexican peso—over the coming months. Due to budget cuts, the light at the end of the current tunnel of economic uncertainty has been turned off.

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