06:17 AM EST, 02/03/2025 (MT Newswires) -- United States President Donald Trump over the weekend followed through on his promises to implement 25% tariffs on both Canada and Mexico as well as raising tariffs by a further 10% on China.

It is the first time that a U.S. president has invoked national emergency powers -- under the Economic Emergency Powers Act or IEEPA -- to impose tariffs, wrote the bank in a note to clients. The tariffs are scheduled to take effect at 12.01 a.m. ET on Tuesday.

The Canadian dollar (CAD or loonie) and Mexico peso (MNX) have understandably been hit the hardest, stated MUFG. USD/CAD hit a high overnight Sunday at 1.4793 and USD/MXN at 21.293. USD/CNH has hit a fresh year-to-date high at 7.3734.

In contrast, the impact on the U.S. Treasury market has been more modest for now, pointed out the bank. The two-year UST yield has risen by around 7bps to reflect market participants scaling back expectations for further Federal Reserve rate cuts in response to the inflationary impact of higher tariffs on imported goods into the U.S.

While MUFG had warned that the Canadian dollar and Mexican peso could decline by a further 5%-10% if 25% tariffs were implemented, the bank didn't expect Trump to fully follow through with those threats, especially against Canada. MUFG will now have to revise "significantly" higher its forecasts for USD/CAD when the bank releases its latest monthly FX Outlook report later Monday to show levels above 1.5000.

So far the initial response for USD/CAD and USD/MXN has been relatively contained considering the scale of the tariff hikes set to be implemented on Tuesday, added MUFG. USD/CAD is currently up by just over 1% and USD/MXN by just over 2%.

It could still reflect some outstanding hope that President Trump will back down at the last minute. He is due to hold calls on Monday with Canadian Prime Minister Trudeau as well as with the Mexican leadership according to Bloomberg but Trump has downplayed expectations of a resolution.

One other option talked about is a possible emergency U.S. court injunction that pauses their implementation. President Trump has set no clear criteria to remove tariffs relating to concerns over fentanyl, immigration and trade. The longer the tariffs are in place the more likely that Canada's and Mexico's economies could fall into recession while the negative impact would be more "modest" on the U.S. economy, according to MUFG.

Exports to the U.S. are worth roughly 20% of Canadian gross domestic product and 30% of Mexican GDP while U.S. exports to Canada and Mexico combined are worth only around 3% of GDP, noted the bank.