Trump unexpectedly hits Mexico with tariffs, driving markets to risk-off mode and lifting Japanese yen and US treasuries as safe havens
Scott Petruska, CFA | May 31, 2019
Donald Trump unexpectedly hit Mexico with 5% tariffs to begin June 10th and rise to 25% by October 1st. They will remain in place until illegal immigrants are stopped from entering the US through Mexico. Investors shifted to risk-off mode, lifting demand for safe haven assets - the dollar, Japanese yen, gold, and US and German bonds.
“Don’t let yesterday take up too much of today.”Will Rogers, social commentator
May 31, 2019
EUR/USD 1.1153 GBP/USD 1.2583 USD/CAD 1.3539 AUD/USD 0.6919 USD/JPY 108.82 USD/CNH 6.9398 USD/ILS 3.6272 USD/MXN 19.7429 USD/CHF 1.0055 USD/INR 69.6987
Save the Japanese yen, the dollar made broad gains following Trump’s announcement of tariffs on Mexican goods. The USD/MXN gapped higher by 1% and is trading at new highs near 19.82 for the year. Safe haven demand increased for US Treasuries, pushing 10-year yields lower by 4 bps to 2.15%.GBP
The UK pound slipped below $1.26 within the overall risk-off shift in the market. In Britain, nearly a dozen candidates are vying for the job of prime minister. Brexiteer Boris Johnson is still the odds-on favorite, increasing the likelihood of a ‘hard’ Brexit, and weakening the pound.EUR
The euro moved little against the dollar in response to Trump’s Mexican tariff announcement, although safe haven demand for German bonds pushed yields to record negative lows at minus 0.21%. Also, German inflation slowed to 1.3%, its weakest pace in more than a year. The ECB meets in two days to set policy and publish their updated economic projections.CAD
Risk-off trading pushed USD/CAD back above 1.35. Canada’s Q1 GDP growth of 0.4% missed expectations of 0.7%, exports fell 4.1% in Q1 from +0.3% in the previous quarter, and imports rose 7.7% compared to -0.7%.ASIA/PACIFIC
The Japanese yen gained 0.75% versus the dollar, as safe haven demand increased following Trump’s surprise announcement of Mexican trade tariffs. The USD/JPY dropped under 109, its lowest level since January 3rd when 107.70 traded.
Unexpectedly weak manufacturing PMI out of China pushed the CNY slightly lower, as did broad risk-off trading. It continues to trade within a 6.88-6.92 range in place over the last two weeks.
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