06:45 AM EST, 01/21/2025 (MT Newswires) -- MUFG noted that United States President Donald Trump on Monday stated his plans to implement a 25% tariff on Canada and Mexico, possibly effective Feb. 1.

Trump cited "the vast numbers of people" being allowed to cross the borders as the reason for the action, wrote the bank in a note to clients. Trump threatened Mexico with widespread tariffs in his first term in office for the same reason but a deal was quickly done and the tariffs were never implemented.

There will be many hoping that like then, a deal will be quickly done with Canada and Mexico to avoid the implementation of a 25% tariff on all imports to the US.

Such action would have a considerable economic impact on not just Canada and Mexico but on the U.S. as well, stated MUFG. 28% of total merchandise U.S. imports came from Canada and Mexico and would as such have a notable impact on lifting inflation in the U.S. quite quickly.

Canada sends between 75% and 80% of its exports to the U.S. and in gross domestic prodcut terms U.S. exports account for over 20% of Canada's GDP. Over 80% of Mexico's exports head to the U.S. but account for a smaller 7% of GDP.

In any case, there is a big incentive for negotiations to commence quickly before these tariffs are implemented. There must be a reasonable chance these negotiations are successful in at least watering down the extent of the tariffs, pointed out the bank. Goods cross the border multiple times in intertwined supply chains that could be hugely damaging, especially for the euro and food sectors.

However, in the meantime, there is certainly scope for both the Canadian dollar (CAD or loonie) and Mexico's peso (MXN) to weaken further.

Trump's inauguration speech was much more focused on immigration than it was on trade. In that sense, the focus on tariffs on Canada and Mexico makes sense, added MUFG. On trade, there is clearly a longer timescale for the markets to wait.

As expected, Trump confirmed a review of the Phase 1 trade deal with China but also set out plans to review the Permanent Normal Trade Relations with China, the USMCA deal, and the adoption of export controls. These reviews are scheduled to be reported by April 1. Europe was also threatened with tariffs if it didn't purchase more natural gas from the U.S.

All told, the actions taken are certainly considerably less than what could have happened and indeed what many market participants were expecting, according to the bank. The US dollar (USD) gains and positioning certainly suggest to MUFG that the foreign exchange markets were expecting more too.

However, it is still highly likely that considerable tariff actions are coming but in what way and exactly when remain unclear. The review date of April 1 could see this become a Q2 risk although with President Trump market participants will be fully aware of the threat of a tariff announcement at any point in time.

That will limit further dollar selling from here but "certainly" at this juncture, the risks of EUR/USD dropping below the parity level this quarter have come down "somewhat," noted MUFG.