resurgence in Canadian Dollar and Mexican Peso as Tariffs Halted

The Canadian dollar (CAD) and Mexican peso (MXN) have rebounded following announcements from leaders of the neighboring countries that they had reached agreements with US President Donald Trump to postpone tariffs by one month.

Canadian Dollar

The CAD surged over 1% late in Monday's trading session, reversing an earlier 1.7% decline. This surge came after Canadian Prime Minister Justin Trudeau announced a 30-day pause on new US tariffs following a call with President Trump.

Mexican Peso

The MXN gained 1.5% after Mexican President Claudia Sheinbaum earlier revealed a similar standstill agreement with the US. The peso had previously weakened by 3% against the US dollar.

Impact on Markets

The Bloomberg Dollar Spot Index rose marginally by 0.2%, after an earlier surge of 1.3% driven by tariff concerns. Both Canada and Mexico agreed to address Trump's concerns regarding the movement of fentanyl.

Market Sentiment

Market analysts suggest that these developments could provide investors with comfort regarding the potential risks associated with long-lasting tariffs. However, they also emphasize the volatility associated with Trump's policies and the potential for market swings in response to future announcements.

Trade War Concerns

The prospect of a trade war, sparked by Trump's announcements of tariffs on Mexico, Canada, and China over the weekend, had driven investors to adopt bullish dollar positions in anticipation of increased inflation and reduced room for interest rate cuts by the Federal Reserve.

Fed's Stance

Atlanta Fed President Raphael Bostic has stated that he prefers to wait before considering further interest rate cuts, citing uncertainty about the future trajectory of the US economy.

Impact on Currencies

The surge in the dollar since Trump's election in November has been accompanied by a decline of over 4% in the CAD due to increased trade restriction threats from the new administration. However, Deutsche Bank's Tim Baker anticipates a "meaningful" respite for the CAD.

Mexico's Agreements

Sheinbaum confirmed several agreements reached with Trump, including joint efforts to address trade and security concerns.

Market Bias

Analysts suggest that these developments reinforce the market bias of viewing tariffs as a negotiating strategy rather than a serious threat. They acknowledge the potential for a deal with Mexico but anticipate greater challenges for Canada.

Impact on Assets

The iShares MSCI Mexico ETF rebounded with a 2.5% gain on Monday afternoon. Mexican dollar bonds outperformed peers, and the nation's five-year credit-default swap declined slightly. Panama's bonds also rose after the country offered free passage for US warships through the Panama Canal and pledged to withdraw from China's lending program.

Volatility and Uncertainty

The ongoing uncertainty surrounding Trump's trade policies is likely to continue to fuel volatility in risk assets. The back-and-forth announcements have contributed to a spike in global foreign-exchange volatility, potentially impacting investment sentiment in both markets and the real economy.