Trump Tariffs Causing Market Tumult

Canada and Mexico likely can’t sustain a long trade war with the US without going into a recession given that they are more reliant on the world’s biggest economy for GDP growth than the US is on them. There is incentive for them to ‘come to the table’ and negotiate, and US Commerce Secretary Lutnick has said as much regarding the possibility of a compromise. So, while markets are currently in a tariff-induced state of tumult, there is scope for a relief rally if someone blinks in the trade war ‘stare down’ which is taking place.

The Dollar Index (DXY) has typically reacted positively to higher trade tensions, but this was not the case on Tuesday. The DXY has slipped below the 106 level, in a sign that there are growing concern about the short to medium term growth implications for the US stemming from the tariff wars. It remains to be seen if this reaction was just a blip or the start of a new trend for how the USD reacts to trade-related headlines. It appears that Trump’s economic policies are taking a medium to longer term view, which is leaving the door open for increasing US economic volatility in the ‘here and now’ (i.e. short-term pain, long term gain). This policy approach is leaving the USD vulnerable however a bounce-back in the currency could occur given that other currencies may depreciate in response to or as a measure against stiffer tariff barriers from the US.

Gold has regained its footing courtesy of the dip in the USD and the ongoing tariff dramas. Safe haven flows have once again found their way to the precious metal with traders feeling nervy about the international growth outlook. Support around the $2830 level held, which has allowed a rebound to back above the $2900 level. Resistance at $2936 and $2956 would need to be cleared for gold to be once again eying off new all-time highs. Moderate support awaits at $2891 lies ahead of firmer support at $2865.

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Oil is under pressure on the prospect of OPEC+ increasing production as planned come next month. The WTI contract (US Crude) is starting Wednesday at around the $67.65 level, which is likely lower than where OPEC+ would like the price to be when if they start increasing daily production in April. There is still a chance they could delay production increases, however cartel members such as Saudi Arabia and Russia may be inclined to increase supply in response to President Trump’s calls for lower oil prices in order to build relations with the US. It is a combination of production increases and the removal of risk-premium from the market (on expectations of a peace deal in the Russia-Ukraine war) which is keeping a lid on oil prices. The $65-$70 range for US oil looks to be in play in the short term.

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While tariff developments have been the driving theme in markets, attention will turn to how the US jobs market has been faring when the NFP (non-farm payrolls) data is released on Friday. Consensus is that we will see around 160k jobs creation for the US during last month, and we will be looking for any revisions to prior data to get a read on how the all-important US labour market is performing during the early stages of Trump’s second term.

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