USD: Rare earths tariffs trigger familiar market panic
Analysts and economists spent their weekend doing the now-familiar scramble, trying to decipher the fallout from the latest US-China trade spat, this time sparked by China slapping tariffs on rare earth exports. Naturally, President Trump responded in true Trump 47 fashion via a Truth Social post that sent markets spinning. Cue the usual chaos, followed by a classic, and rather humiliating, TACO climbdown that left everyone wondering what the point was in the first place.
The US Dollar (USD) retreated into the end of last week, giving up some of its earlier gains as this fresh round of US-China tensions blindsided investors, proving that the tit-for-tat skirmishes are far from over. Beijing fired the opening shot this time, unveiling a comprehensive and seemingly out-of-nowhere set of export controls on rare earth elements and certain lithium-ion batteries, critical inputs for US tech, defense, and auto giants. The move, which could put a chokehold on key supply chains, prompted a dramatic response from President Trump, who threatened to double existing tariffs on Chinese imports by an additional 100% come November 1st. On the surface, China’s actions signaled a clear willingness to weaponize its economic leverage, putting the Trump administration in a tight spot.
By Friday, markets had already gone into panic mode. The mere threat of sweeping new tariffs, combined with the real supply-chain risks from China’s rare earth restrictions, sent investors scrambling. The tech-heavy Nasdaq Composite took a heavy hit, plunging 3.6% (820 points), while the broader S&P 500 logged its worst day since April, sliding 2.7%. Investors rushed into safe-haven assets, pushing 10-year Treasury yields lower and weakening the broad dollar index. The message was clear: China has the strategic capability to hit the very tech firms that have powered the US market’s recent highs.
By Sunday, however, the tone shifted. Trump took to social media again, telling everyone to “not worry about China,” in what looked like a de-escalation attempt. Meanwhile, China’s Commerce Ministry issued a statement saying, “we do not want a tariff war, but we are not afraid of one,” urging the US to resolve differences through dialogue and calling repeated tariff threats “not the correct way to get along with China.”
The administration’s trade strategy, which had gone back on the offensive earlier this year to force China’s hand, now appears to be backpedaling. The latest skirmish ended in a temporary truce after fears of a “sudden stop” to the global economy briefly seized markets on Friday. Markets bounced strongly on Monday, and the US Dollar recovered. However, caution will linger, and tensions between the countries are likely to stay. Just last night, China has sanctioned five US units of South Korean shipping company Hanwha Ocean Co., escalating a long-standing dispute over maritime dominance and threatening further retaliation against the industry. This action is the latest in a series of tit-for-tat moves between Beijing and Washington, which have already included slapping special port fees on each other’s vessels, as both sides seek leverage ahead of expected trade talks.
With China not only limiting access to crucial industrial materials but also maintaining its freeze on US soybean purchases, the headwinds for President Trump, and American farmers, are unlikely to ease. Trump may try to show a willingness to negotiate by keeping his planned meeting with President Xi and dialing back tariff threats. But if he chooses the hardline route, it could prove a costly gamble, one that leaves US industries, not Beijing, footing the immediate bill. To make matters more complicated, the Treasury’s decision to extend a swap line to Argentina, aimed at stabilizing its collapsing peso, has drawn sharp criticism from domestic stakeholders, particularly US farmers. With agricultural exports already under pressure from China’s retaliatory freeze and broader global demand weakness, many see the Argentina lifeline as a misallocation of resources that could have been better directed toward struggling domestic sectors.
In the bigger picture, this latest escalation sharpens the focus on who can unwind their dependencies faster. China is aggressively building domestic capacity to reduce its reliance on US tech, especially in semiconductors. Meanwhile, the US faces a long and difficult road to break free from China’s near-total control over rare earth processing.
With no major macro data on deck this week, markets will turn their attention to Q3 earnings. Thirty-six S&P 500 firms are set to report, with financials in the spotlight. BlackRock, Wells Fargo, JPMorgan Chase, Goldman Sachs, and Citigroup kick things off today, followed by BofA and Morgan Stanley on Wednesday. One key will be whether the broader S&P 500 universe will suffer any margin erosion from elevated heights. A possible reason could be supply chain cost pressures, including but not limited to tariffs, as a first-round response, versus whether productivity and cost controls, including reduced hiring, may be offsetting.
CAD: Continued pressure
The Loonie has found insufficient relief even after a positive jobs report. Trading at 1.406, the currency remains above its 200-day simple moving average and marks its highest level since April 10 this year. Its struggle is due to a dual headwind: first, the recovering US Dollar, which has been showing bottoming signals for several weeks; and second, the idiosyncratic issues affecting the Euro and Yen that are pulling the entire G10 complex lower. Together, these pressures have fueled a 1.5% month-to-date rise in the US Dollar, a move that persisted despite the recent “tariff tantrum” episode. A lingering question in the FX markets is how long the US Dollar can defy the pressures of a prolonged government shutdown. The Loonie, however, seems destined to remain subdued as long as competing currencies struggle with their domestic challenges and absent data continues to provide a supportive backdrop for the USD.
There were several positives on the latest job report in Canada. Economists had anticipated a modest net change in employment of 5K, but the actual figure was a robust increase of 60K (+0.3%). The job growth helped to partially offset cumulative declines from the previous two months. A key driver of the overall gain was a sharp increase in full-time employment, which rose by 106K, while part-time employment saw a decline. The employment rate also rose slightly to 60.6%. Average hourly wages grew at a solid 3.3% year-over-year pace.
The report’s positive momentum was concentrated in specific demographics, with significant employment increases for core-aged workers (25 to 54 years), both men and women, while employment fell among people aged 55 and older. Industry-wise, job gains were notable in manufacturing, health care and social assistance, and agriculture. Regionally, Alberta led the gains, more than offsetting prior provincial declines. However, the overall weakness in the job market hasn’t changed, as seen by the unemployment rate, staying at 7.1%, highest level since 2016 outside the pandemic, the youth unemployment rate edging up to 14.7%, and the report highlighting a continued challenge for highly educated recent immigrants, who faced increasing rates of overqualification and working in jobs unrelated to their field of study.
MXN: Consolidation phase
The USD/MXN’s impressive year-to-date appreciation, fueled by a robust carry trade appeal, has now shifted into a phase of choppy, sideways consolidation, with the pair hovering near the 18.40 handle. This recent low-volatility price action represents a post-event calm following the mid-September turbulence from the U.S. Federal Reserve’s rate decision and last Friday’s U.S.-China trade spat. That geopolitical friction briefly sent investors fleeing Latin American currencies, pushing the Peso to trade as high as 18.6, its highest level in a month.
Fundamentally, the Peso remains supported by its significant interest rate differential and Mexico’s sound macro stability. For the short-term, the USD/MXN is expected to continue this range-bound crawl. The structural support at 18.30 is critical: as long as it holds and the market anticipates further U.S. rate cuts, the MXN’s favorable high-carry, high-beta nature will benefit from low global volatility and stable global growth. Crucially, the key domestic risk of carry erosion has diminished, as local drivers (like slowing services inflation and weak economic activity) signal a gradual, predictable path for Banxico rate cuts. This predictability removes the “shock” risk and ensures the high yield differential remains a powerful magnet for capital.
The main technical barrier to watch on the weekly chart is the 18.50 area. A decisive break above this level would signal a temporary dollar recovery and a weakening sentiment toward Latin American and emerging market assets.
G10 pairs hit extremes as Dollar gains ground
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Calendar: October 13-17 (US CPI will be published on October 24 at 8:30 am ET)
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
