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Market Wire:
Trump Drops Mexico Tariff Threat, Setting Stage for Market Recovery

Karl Schamotta June 10, 2019

President Trump has announced that the United States will not apply tariffs against goods imported from Mexico, reversing a decision made on May 30th. The president had threatened to impose escalating tariffs on all Mexican goods from Monday, beginning at 5 percent, before ratcheting up to hit 25 percent in October.

In two tweets sent a short time ago, Mr. Trump said “The Tariffs scheduled to be implemented by the U.S. on Monday, against Mexico, are hereby indefinitely suspended. Mexico, in turn, has agreed to take strong measures to stem the tide of Migration through Mexico, and to our Southern Border. This is being done to greatly reduce, or eliminate, Illegal Immigration coming from Mexico and into the United States. Details of the agreement will be released shortly by the State Department”.

Republican opposition to the proposed tariffs may have played a role, with a number of senior lawmakers expressing concern over the past two weeks – but overarching economic concerns are also likely to have influenced the President’s decision to accept Mexico’s proposed migration measures.

With taxes on imports expected to inflict severe damage on the intricately-integrated North American economy, markets came under severe selling pressure this week – and financial conditions have tightened markedly, threatening to push the economy into recession ahead of the 2020 election.

The Mexican peso is expected to rise at the open on Sunday afternoon, with risk-sensitive currencies like the Canadian dollar following suit – unless, of course, Mr. Trump issues new protectionist threats in the interim.

Bottom Line: In avoiding a self-planted economic landmine, President Trump has acted to limit the uncertainty levels that have crippled financial markets over the last eight days. In the short term, emerging market and commodity-linked currencies look likely to benefit, but this step could also potentially reduce pressure on the Federal Reserve to announce emergency rate cuts – enabling a renewed rise in the dollar.

Say what you will about Mr. Trump – but he’s good for foreign exchange volatility…

Karl Schamotta
Chief Market Strategist
kschamotta@cambridgefx.com
@vsualst

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