The big news rattling markets at the start of the new week is that President Donald Trump signed orders imposing tariffs of 25% on Mexican imports, 25% on Canadian non-energy goods, 10% on Canadian energy, and a 10-percentage-point increase on Chinese imports. Details remain unclear, and potential reversals are possible before implementation on Tuesday. These tariffs target imports from the US’s three largest trading partners, impacting approximately $1.3 trillion in trade and nearly 5% of GDP. These numbers will increase when Trump follows through with fresh threats of tariffs on the EU, which he said “will definitely happen”. He justifies the measures as a step toward rebalancing trade and fostering self-sufficiency. While acknowledging short-term economic pain for Americans, he believes long-term benefits outweigh the costs.
As if this wasn’t enough bad news for the rand to contend with, Trump also threatened to cut off aid to South Africa over its controversial land expropriation policies. The move marked a stark condemnation of how foreign observers may perceive South Africa’s domestic political stance, not to mention its positions on Russia and Palestine. Recall that President Ramaphosa recently signed the Expropriation Bill into law, enabling expropriation for public purposes or in the public interest, including instances of no compensation. Although the law came with strict safeguards in place, requiring negotiation attempts, public notices, and opportunities for objections, its signing was a red flag to investors that SA didn’t need to wave. It is unclear how the Expropriation Bill will meaningfully improve socio-economic conditions in South Africa, but it comes with clear risks from an optics perspective.
ZAR Markets
The market volatility that was always anticipated once Donald Trump took office is on display this morning after he made good on his threat to impose tariffs on imports from Canada, Mexico, and China. The move has drawn criticism from many corners of the globe that believe that a full-blown trade war might detract from economic growth more broadly. The timing is also poor given the tail end of the business cycle, and stock markets might, therefore, become a lot more sensitive to the Trump administration’s actions than might’ve otherwise been the case. Many currencies, including the ZAR, have been battered this morning, which is a barometer for what’s to come. In fact, the ZAR is amongst the worst performers this morning, taking an additional hit due to Trump’s threats to cut off aid to SA over the government’s land expropriation policies. After gapping higher at the start of trade, the USD-ZAR appears to have run into technical resistance around 19.0000, but volatility remains the order of the day and the mid-January highs around 19.2000 could still be hit.
Global FX Markets
The Asian session has been driven by the market digesting the news of US President Trump announcing tariffs against China, Mexico and Canada over the weekend, coupled with the retaliatory tariffs from these respective countries. Trump is steadfast in his belief that tariffs will reshape the global trade dynamics however, the economic fallout is likely to be large. The dollar has surged as a result of risk-off with the USD Index looking to break 110.00 as we enter the EU open. The single currency closed below EUR/USD1.0400 last week following the ECB’s decision to cut rates by 25bps against the Fed’s decision to keep rates on hold. These central bank decisions will be largely forgotten this morning as the EU deals with the threat of trade tariffs from the US as Trump moves further along with his agenda to bring back economic capacity and manufacturing to the US. Ahead of the EU open we have the single currency trading at EUR/USD1.0220 against the greenback. Sterling is strongly offered this morning in Asia however, the GBP/USD seems to have stabilised around GBP/USD1.2250 into the London open. Further liquidity will be added as London comes online and this may provide a floor for the currency. That said, January lows of GBP/USD1.2097 cannot be ruled out. The USD/JY has been less volatile than the other majors this morning with investors instead focusing on the crosses such as the EUR/JPY. Markets are expected to remain choppy this morning as price discovery takes place following the events surrounding Trump’s trade war over the weekend.