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The long-awaited U.S. reciprocal tariffs announced have been large and broad-based, but critically exempt Canada and Mexico (at least for now) through CUSMA/USMCA compliant trade.

The announcement includes a baseline 10% minimum tariff rate for all countries as of April 5th, but with substantially higher tariff rates imposed on specific countries to follow on April 9th —particularly those that make up the bulk of the U.S. trade deficit. That includes a 34% increase on import tariffs from China, 26% on India, a whopping 46% on imports from Vietnam, and 20% on imports from the European Union.

Tariffs on imports from Canada are still set to rise on Thursday. Auto tariffs announced last week will still push the average U.S. tariff rate on imports from Canada to about 3.5% from 2.5% by our count. That increase will still matter, but looks small now compared to dramatically higher tariffs set to be imposed on other countries.

A lower tariff rate increase is positive for Canada on a relative basis, and it eliminates what had been a growing incentive for U.S. importers to purchase goods from other regions. But, that will be little consolation if overall tariffs are large enough to shrink U.S. demand and the total U.S. import market overall.

Prior tariff announcements have been significantly altered or rolled back days (or even hours) after, and there is a big possibility that tariffs announced today will look different a week from now. But, if the measures today are implemented, it would push the average U.S. import tariff rate to over 20%— according to our estimates—the highest rate in more than a century.

Today’s announcement will not be the last on trade from the U.S. administration and we will continue to rely on our tariff playbook to assess about how these announcements will impact the Canadian economy.

Magnitude of tariff hikes add downside risks to U.S. growth and supply chains.

Broadly speaking, we have argued before that U.S. buyers will have difficulty finding domestically produced alternatives to imports. A wave of retirements and immigration cutbacks limit the amount that American production can increase in the near-term, and capital investments to “reshore” manufacturing production will take years and billions.

Given those constraints in the near-term to U.S. domestic production capacity, the impact of tariffs depends largely on whether alternative, cheaper import markets are available. Canada’s position compared to other countries on import tariffs looks substantially better today than it did yesterday. But, there’s also the looming threat of whether the total tariffs imposed are large enough to significantly weaken U.S. economic growth and shrink the size of the total import pie.

Furthermore, even though, most of Canada’s trade is directly with the U.S., supply chain disruptions after pandemic lockdowns eased is a reminder of how disruptions globally can spill over to Canadian production and price growth.

The U.S. economy is much less trade sensitive than many of its trading partners (including Canada)—and we do not have a recession as a base case expectation for the U.S. economy. But, tariff hikes, headwinds from government spending cuts, and reduced immigration are adding to yellow flags in the U.S. economic outlook.

Trade uncertainty is here to stay

With or without additional tariff measures, trade uncertainty is threatening to slow consumer and business spending.

Our tracking of Canadian consumer spending is holding up significantly better than consumer confidence so far. And, motor vehicle sales spiked higher in both Canada and the U.S., likely in part as consumers rushed to get ahead of possible auto tariff hikes. But, we expect business investment will remain weak regardless of additional tariff measures.

The U.S. administration announced broad reciprocal tariffs today, targeting all trading partners, and not just the countries that run large trade surpluses with the U.S. The tariffs will be implemented under the International Emergency Economic Powers Act (IEEPA) of 1977.

Using IIEPA authority, the U.S. will impose a 10% tariff on all countries, effective April 5th, 2025. However, the administration also imposed higher tariff rates on countries with the largest trade deficits, which takes effect April 9th.

Based on today's announcement, we estimate that the U.S. effective tariff rate will jump to over 20%, the highest level since the 1940's and a larger increase than what occurred under the Smoot-Hawley legislation during the early 1930s.

Canada is exempt from reciprocal tariffs and the baseline 10% rate, as prior tariff announcements remain in effect. This leaves the effective tariff on Canada at around 10%, close to what we assumed in our March quarterly forecast. This rate is likely to come down as more companies adjust to qualify their goods as USMCA compliant. Given the scarring on consumers and businesses, our forecast for a pullback in economic growth alongside higher inflation remains intact.

Relative to our baseline assumptions, the tariff rates for non-USMCA countries are a step higher. For the E.U. the 20% rate announced today is in line with what we had assumed. However, this is not true for all others. China will be more heavily hit than our baseline assumption of 30%. Likewise, on other trading partners, we had assumed a blanket 5% rate which is now a minimum of 10%, with many countries higher like Taiwan, South Korea and Vietnam at 32%, 25% and 46%, respectively.

U.S. Implications

Today's announcement will raise the U.S. effective tariff rate to over 20%, the highest level since the early-1940's and notably above the 14% assumed in our Quarterly Economic Forecast. At this point, the big unknown is duration. Our forecast assumes that the peak tariff rate remains in-effect for just six-months, after which most countries/regions (except for China) see some reprieve. Should the tariffs remain elevated for longer, the odds of U.S. economic stagnation rises. Likewise, inflation is at risk of approaching 4% or more.

Heightened trade uncertainty has already led consumers to tap the brakes, with households increasingly worried about inflation, employment, and income prospects. Consumer spending is tracking a paltry 0.5% in the first quarter, after expanding by a robust 3.6% annualized in H2-2024.

The constant saber-rattling of tariff threats has also distorted trade flows, with imports surging in recent months as businesses try to front-run the tariffs. Net trade could shave several percentage points from Q1 GDP growth. Given the weak spending backdrop, the economy is at risk of contracting.

Tariffs that remain in place indefinitely would force some reshoring of production, but this would be a multi-year process and would come at a cost. Assuming a permanent tariff rate close to today's proposed level, our model suggests that it could lift the level of employment by nearly 500,000 in the long-run, most of those jobs related to manufacturing. However, the tariffs would also raise the average household's cost of living by over $4,850 per year – equivalent to a tax hike of 2% of GDP – implying an associated cost of $1,250,000 for every job reshored.

• Reshoring jobs is just the first hurdle. The manufacturing sector faces significant headwinds with persistent skill and labor shortages. Job openings within the sector already sit at more than 450,000 positions. Adding another 500,000 positions over the coming years will be a challenge without significant investments in skills training and recruitment, particularly for software and technical skills. The manufacturing jobs of yesterday are not those of the future.

The tariffs are likely to be viewed as helping to pay for proposed tax cuts. These include exempting Social Security payments, tip income and overtime pay from taxation. Combined, these policy changes are estimated to cost north of $3.5 trillion over the next decade, in addition to the $4 trillion required to extend the 2017 Tax Cuts & Jobs Act (TCJA). If today's tariffs become permanent, they could generate an estimated $6 trillion in revenue over the next decade, more than offsetting the cost to extend TCJA. Extending TCJA avoids fiscal tightening, but does not provide an additional boost to momentum. The economic multiplier is zero (see Perspective).

Canada Implications

For now there are no changes for Canada relative to prior announcements. Canada is exempt from the reciprocal tariffs and the baseline 10% rate.

Instead, Canada will continue to be subject to the 25% “fentanyl/illegal immigration” tariff, with 10% on energy and carve outs for USMCA compliant goods. It’s estimated that around 40% of the dollar value of goods travelling across the border are declared as USMCA compliant, although more firms may make the effort to become compliant. It’s estimated that 80-90% of the value of exports could become USMCA compliant. If the U.S. decides that progress has been made on fentanyl/illegal immigration, the 25% non-compliant tariff will be cut to 12% (and energy/potash would be exempt all together).

Past tariff announcements have already begun snaking through supply chains, such as 25% on steel and aluminum. Then there’s the 25% tariff on finished vehicle imports that take effect tomorrow. As it stands, the effective tariff on Canada is now around 10%, up from less than 2% before President Trump came into office. This is close to the 12.5% we assumed in our baseline forecast last month. Bear in mind that USMCA -compliant auto parts and lumber are still caught in the crosshairs without a specific timeline.

Canada previously retaliated with approximately $60 billion in tariffs on U.S. goods, with the next tranche set at $125 billion based on the Liberal government's guidance in February. With elections on April 28th, how the incoming government will respond remains to be seen.

Our baseline assumed all levels of Canadian government would spend an extra 1% of GDP in 2025 to support growth. That now appears to be on the low end. Based on the provincial budgets released to date, stimulus measures have already totaled 0.3% of GDP. Ontario is expected to release its budget sometime in mid-April, potentially bringing the cumulative fiscal spend to 1% of GDP. Adding Federal fiscal measures could double this figure. Although this will take the sting out of tariffs, it won’t prevent near-term economic stagnation as companies and labour markets absorb the policy shock. Canada will need to brace for a long period of economic restructuring. Even if the tariffs are removed or lessened in short order, Canadians cannot “unsee” the past three months. Returning to a place of commitment and trust would be unrealistic.

Inflation is expected to reach above 3% by the summer, with any easing achieved through lower tariff rates. For the Bank of Canada, they will be closely monitoring two areas: inflation expectations and governments' response. As the central bank has noted, they have limited capacity to push against a policy shock of this nature. Don’t expect a substantial drop in interest rates, but there is room for at least 50 basis points of cuts to ease financing costs.

• The Trump administration's tariff plans are here, what will the implications be for the S&P and Dow Jones?
• Technology companies in the S&P 500, like Apple and Microsoft, are particularly vulnerable to tariffs due to their reliance on non-US markets.
• Analysts expect protracted negotiations regarding tariffs, leading to continued market fluctuations.
• Despite the uncertainty, the S&P 500 historically performs well in April, offering a potential silver lining.

Wall Street Indexes have seen a mixed bag today with wild swings between gains and losses. Market participants moved closer to understanding the Trump administration's tariff plans on Wednesday, but with few details available, financial markets stayed unpredictable.

There have been a host of rumors filtering through throughout the day with some suggesting President Trump's Tariffs will be banned 10%, 15% and 20% depending on country and by industry.

Tariffs could greatly impact corporate profits, global growth, inflation, and Federal Reserve interest rate decisions.

At the start of the year, investors were optimistic about the Trump administration's pro-growth policies, but a flood of tariff-related news has shaken their confidence.

While most agree that Wednesday's much-anticipated announcement could be key to the short-term direction of global markets, there’s uncertainty about how prices will move and what might happen next, as negotiations could drag on.

Which stocks are most vulnerable to tariffs?

Companies that make up the S&P 500 generate about 40% of their revenue outside of the United States. This leaves Wall Street exposed to potential trade wars that hamper the free flow of goods and services.

S&P 500 technology companies such as Apple, Microsoft and NVIDIA rely on non-US markets for over half their sales. Given the poor performance by some of them so far in 2025, caution appears to be the only game in town.

Meanwhile the sectors that appear the least exposed to a potential trade war include real estate and utility companies who receive only a small amount of revenue from non-US sources.

Source: LSEG

We have heard comments from CEOs across various sectors in recent weeks warning about potential price increases being passed onto the consumer. This does not bode well for the US either. There is a notable split and in my opinion a clear lack of understanding by many politicians as to how tariffs may impact the everyday American as well as consumers in other countries.

What can we expect moving forward?

There does seem to be a lot of conflicting views as to how markets may shape up tomorrow and the days ahead. However, the one area analysts seem to agree on is that today's announcement is just the beginning with most expecting protracted negotiations moving forward.

The possible outcomes can be seen as good, bad, or very bad. A good outcome would be fewer tariffs or ones that are more focused and balanced.

The announcement comes at a critical time for the S&P 500 after it confirmed a correction by dropping as much as 10% since mid February highs.

Looking for a reason to be optimistic around the S&P 500 and there may be a silver lining. Historically, the S&P 500 has performed well in April, averaging gains of over 2% since 1950 when starting below its 200-day moving average. Given the positive start to April however, the S&P 500 is already up around 0.80% at the time of writing.

Source: Isabelnet, Bloomberg

Technical Analysis - Dow Jones

From a technical standpoint, the Dow Jones has enjoyed a positive start to the month but today's whipsaw price action does not bode well.

Given that markets are expecting negotiations post the tariff announcements today, markets could be set for more uncertainty and thus more whipsaw price action in the days ahead.

The Dow is hanging between two key levels having tested both today with immediate resistance resting at 42446 and support at 41950.

A move beyond 42446 brings the 42764 and 43402 handles into focus.

A move lower from here and 41400 and 40000 will become key areas of concern.

For now though, committing to a direction seems foolish even though the recent correction may look like a good opportunity for buyers, there is a chance that more downside may be in store for the Dow and other Wall Street indexes.

Dow Jones (US30) Daily Chart, April 2, 2025

Source: TradingView (click to enlarge)

Support

• 41950
• 41400
• 40000

Resistance

• 42446
• 42764
• 43402

• An increasing probability of stagflation risk in the US may see further narrowing of the 2-year sovereign yield premium spread between US Treasuries and JGBs.
• CAD/JPY is the second worst-performing major yen crosses in the past three months.
• CAD/JPY may see another round of impulsive down move sequence with the following medium-term supports coming in at 99.60 and 97.55.

This is a follow-up analysis of our prior report “CAD/JPY Technical: Trump’s shock and awe trade policy manoeuvre erased CAD gains” published on 21 January 2025.

Since the publication of our prior analysis, the price actions of CAD/JPY have declined by 6.6% to print a low of 101.38 on 11 March 2025, which hit the first medium-term support of 101.80 mentioned in our earlier report.

Thereafter, it recorded a bounce of 4.4% to print a recent high of 105.87 on 26 March ahead of US President Trump’s 2 April “Liberation Day” announcement of reciprocal trade tariffs. Canada has already been hit with 25% tariffs on certain goods.

Even though the Canadian industry has been left unscathed from the US reciprocal trade tariffs announced on 2 April, Canada will still be hit with the universal 25% automobile tariffs that is taking effect today, 3 April, with other sectorial/industrial tariffs such as lumber to be enacted by the US White House soon.

Several yen crosses have started to show weakness

Fig 1: 3-month rolling performance of G-10 JPY crosses with 2-year US Treasury/JGB yield spread as of 3 Apr 2025 (Source: TradingView)

Weakness in several major G-10 yen crosses has resurfaced for the past week, driven by a narrowing of the 2-year sovereign yield premium spread between US Treasuries and Japanese Government Bonds (JGBs), and rising systematic risk from US trade tariffs woes.

Based on a rolling three-month performance as of 3 April, the CAD/JPY is the second-worst performing (-4.9%) major yen cross pair, just hovering above the worst hit USD/JPY (-5.8%) at this time of the writing (see Fig 1).

Stagflation risk in the US may reinforce further yen strength

Fig 2: University of Michigan Consumer Sentiment Index with inflation expectations as of Mar 2025 (Source: TradingView)

The latest finalised University of Michigan Consumer Sentiment Index for March has plummeted to 57 from its prior month reading of 64.7. Consumer sentiment in the US declined for a third consecutive month to hit the lowest since November 2022.

In addition, in the same survey report, both the 1-year and 5-year inflation expectations soared significantly, with the 5-year forward-looking inflation gauge soaring to a 32-year high of 4.1% in March.

These recent observations suggest a rising risk of stagflation in the US economy due to uncertainties in growth prospects and the cost of living, which are exacerbated by the current US White House's erratic and aggressive trade tariff policy.

An increasing probability of a stagflation environment may see a further narrowing of the 2-year sovereign yield premium spread between US Treasuries and JGBs as US economic growth and corporate earnings get revised downwards, in turn, benefiting the yen that takes up the role as a currency hedge (see Fig 2).

CAD/JPY’s bearish reaction below its 50-day moving average

Fig 3: CAD/JPY major & medium-term trends as of 3 Apr 2025 (Source: TradingView)

The recent corrective rebound of the CAD/JPY from its 11 March low may have reached its terminal point on 26 March as price actions of the CAD/JPY have shaped a bearish reaction candlestick after a retest on its downward sloping 50-day moving average, and the former long-term secular ascending channel from the March 2020 low now turns into a pull-back resistance after price actions breached below it on 21 February 2025 (see Fig 3).

In addition, the daily RSI momentum indicator has flashed out a bearish momentum condition which supports the start of a potential impulsive down move sequence.

Watch the 108.30 key medium-term pivotal resistance (also the 200-day moving average), and a break below 101.80 exposes the next medium-term supports at 99.60 and 97.55.

On the other hand, a clearance above 108.30 invalidates the bearish scenario for the next medium-term resistances to come in at 111.45 and 115.90 next.

Silver: ⬆️ Buy

• Silver reversed from the support area
• Likely to rise to the resistance level 34.50

Silver recently reversed up from the support zone between the support level 33.50 (former monthly high from February), 20-day moving average, support trendline from February and the 50% Fibonacci correction of the upward impulse from March.

The upward reversal from this support area continues the active impulse waves iii, 3 and (C) – inside which Silver has been moving since December.

Given the strong daily uptrend, Silver can be expected to rise to the next resistance level 34.50 (the former monthly high from last month).

AUDCHF: ⬆️ Buy

• AUDCHF reversed from the support area
• Likely to rise to resistance level 0.5600

AUDCHF currency pair recently reversed up from the support area between the pivotal support level 0.5485 (which stopped the earlier impulse wave i at the start of March) and the lower daily Bollinger Band.

The upward reversal from this support area formed the daily Japanese candlesticks reversal pattern Hammer Doji.

Given the bullish divergence on the daily Stochastic indicator, AUDCHF currency pair can be expected to rise to the next resistance level 0.5600 (top of the previous correction ii).

EURNZD: ⬇️ Sell

• EURNZD reversed from resistance area
• Likely to fall to support level 1.8700

EURNZD currency pair recently reversed down from the resistance area located between the resistance level 1.9100 (which stopped the earlier sharp upward impulse wave I at the start of March) and the upper daily Bollinger Band.

The downward reversal from this resistance area stopped the earlier short-term impulse wave iii of the upward impulse wave 3 from the end of February.

Given the strength of the resistance level 1.9100, EURNZD currency pair can be expected to fall to the next support level 1.8700.

USDJPY remains at the back foot on Wednesday and dips further below 150 level, which reverted to solid resistance (three consecutive attacks stalled here).

Fresh weakness pressures 20DMA (149.06, where bears faced strong rejections in past two days) which offers good support, along with nearby 50% retracement of 146.53/151.20 upleg (148.87).

Rising risk aversion ahead of tonight’s tariff decision continues to underpin demand for safe haven Japanese yen.

The pair is likely to accelerate lower if President Trump opts for implementation of full package of import tariffs, which would escalate trade war and further destabilize already fragile conditions in the global economy.

Sustained break of 149.06/148.87 to confirm an end of corrective phase (146.32/151.20) and expos targets at 148.32 and 147.64 (Fibo 61.8% and 76.4% respectively).

Strong barriers at 150.00 (psychological/10DMA) should keep the upside protected and maintain bearish bias, while firm break higher would be a game changer.

Res: 150.00; 150.26; 151.00; 151.38.
Sup: 149.06; 148.87; 148.32; 148.00.

Markets

US President Trump has been keeping the market in extreme suspense the last few weeks and especially days with what he calls “the Big One”. That’s referring to a major tariff policy plan that almost certainly trumps all the levies POTUS already introduced earlier this year. The big unveil is almost there and markets are anxious to know the outcome. And yet, mere hours before “Liberation day” there are a lot of unknowns that reportedly are still being discussed as we write. Proposals floated by the media include a tiered system with a flat 10% or 20% rate for all countries as well as a more customized reciprocal plan but with unspecified tariff levels. The baseline is to “[We] charge them what they charge us” but Trump said they’ll look beyond the obvious tariff barriers that certain countries have in place to include non-tariff barriers as well. He has for example lashed out at Europe’s VAT system which he says favours domestic companies over foreign (ie US) ones. It’s also unclear what countries the Trump administration plans to target with the scope most likely broader than just countries having a trade surplus with the US. Lastly, we don’t know whether the tariffs are scheduled to kick in immediately (according to the White House press secretary Leavitt’s “understanding”) or if there’s still some time for negotiations to try to avoid them. Finally having answers, however bad they sound, could ironically bring some relief after an initial Pavlov risk off market reaction.

Going into the announcement, markets understandably err to the side of caution regardless of solid but second-tier US data. The unofficial jobs report from ADP printed a 155k employment growth in March, picking up from 84k and beating the 120k consensus. “Despite policy uncertainty and downbeat consumers, the bottom line is this: The March topline number was a good one for the economy and employers of all sizes, if not necessarily all sectors.” ADP’s chief economist summarized. Stocks in Europe decline about 1%, Wall Street opens between 0.7-1.2%. Core bonds get a nice bid with safe haven flows pushing US Treasury yields down between 2.1-3.8 bps across the curve. The German curve bull flattens with euro area money markets pricing in the lowest end-of-year ECB policy rate (+/- 1.75%) since early February. Net daily changes amount to -0.8 to 2.8 bps. Currency markets disconnect from the typical risk aversion though with especially a lackluster dollar catching the eye. A growing stagflationary narrative has been weighing down on the greenback and tariffs are obviously not soothing any of the concerns. DXY revisits 104, EUR/USD tops 1.08(2). A strong outperformance by FX Down Under and high up north is (again) striking. EUR/SEK hits a new 2.5 year low around 10.74.

News & Views

The Hungarian debt agency (AKK) updated its 2025 funding plan. At the end of Q1, they completed 38% (HUF 4378bn) of the planned yearly gross issuance which was raised from HUF 10 096bn to HUF 12 503bn. For the remainder of the year, AKK plans to increase institutional government auctions, while lowering the expected net financing from households. The planned volume for HGB auctions increases from HUF 4742bn to HUF 5151bn. Tenorwise, AKK wants to focus more on 5-yr bonds and less on 10-yr bonds as per investor demand. Net retail financing decreases by the same HUF 408bn, from HUF 1323bn to HUF 915bn. The average term-to-maturity of Hungarian central government debt is 5.6 years, 4.2 years in case of HUF debt and 8.7 years in case of FX debt. The FX debt share will decrease below 30% by the end of the year from 30.3% currently. AKK plans some final FX-issuance (90% already covered) later this year in the Chinese markets.

The Czech Statistical Office announced that the government deficit decreased from 3.7% of GDP in 2023 to 2.2% of GDP in 2024. In nominal terms, the deficit amounted CZK 177.2bn. In the YoY-comparison, total revenue, of which mainly received social contributions, was increasing more (+6.8% YoY) than the expenditure (+2.9% YoY). The government debt ratio increased from 42.5% of GDP to 43.6% or CZK 3492.2bn in nominal terms.