06:17 AM EST, 01/31/2025 (MT Newswires) -- The weekend will be the first test of how serious United States President Donald Trump is with his protectionism threat as Canada and Mexico face a 25% tariff deadline on Saturday, said ING.

Neither the Canadian dollar (CAD) nor Mexico's peso (MXN) were fully pricing in the tariff risk when Trump reiterated his protectionism plans versus USMCA partners on Thursday, and the remarks caused a CAD and MXN selloff and broader US dollar rally, wrote the bank in a note.

Markets continue to treat those threats with a dose of caution and should tariffs be imposed on Saturday, both CAD and MXN face "major" downside risks, stated ING.

Earlier in the week, Trump's pick for the Commerce Department, Howard Lutnick, said that the two countries could avoid tariffs if they delivered on border requests. One benign scenario could see Trump striking last-minute deals with U.S. neighbors and lifting -- or at least suspending -- the tariff threat, pointed out the bank.

The new administration's dealing with this U.S.-Canada-Mexico situation will likely be used by markets as a benchmark for Trump's trade policy moving ahead, and should as such have large repercussions for global foreign exchange, added ING.

If Trump doesn't deliver on his threat by Saturday, markets should see the US dollar depreciate not just against CAD and MXN but also with other currencies that are embedding tariff risks, such as the Australian dollar, New Zealand dollar and euro, according to the bank.

Investors' intuition could be that Trump will only use tariffs as a threat for negotiations, but ultimately refrain from hitting major partners.

ING expects the US dollar to be primarily driven by the tariff story. If investors don't get news on the tariffs by the end of Friday, that would probably lead to a stronger US dollar as markets price in a greater chance of tariffs being announced on Saturday.