In less than two weeks, Trump is about to take office as the President of the USA, but now the world markets from Asia to Europe, and from Canada to Mexico, are experiencing the so-called "Trump Shock."

Trump promises to impose tariffs of up to 10% on global imported Commodities, 60% on Chinese Commodities, and an additional 25% import fee on products from Canada and Mexico. Trade experts indicate that these tariffs will disrupt trade flows, increase costs, and provoke retaliation.

Although the scale and scope of Trump's tariff policy are yet to be seen, there is no doubt that the road ahead will be fraught with challenges.

1. The euro faces a "double blow"

Since the USA election, the euro has fallen by more than 5% against the dollar, marking the largest drop among major currencies, reaching a two-year low of about 1.04. JPMorgan and Rabobank believe that due to the uncertainty of the tariffs, the euro may fall to parity with the dollar this year.

The USA is the EU's most important trading partner, with bilateral Commodity and service trade amounting to 1.7 trillion dollars. Markets expect that the European Central Bank will cut interest rates by 100 basis points this year to support the weakening economy. However, traders anticipate that tariffs may drive up inflation in the USA, thus expecting that the Federal Reserve will only cut rates by 40 basis points this year, enhancing the appeal to Buy dollars and Sell euros.

According to ING currency strategist Francesco Pesole, the simultaneous imposition of tariffs by the Trump administration on China and the EU could be a "very harmful mix for the euro."

The tariff tensions may cause the Euro to drop to parity with the Dollar.

2. The Automotive Industry is facing troubles.

In Europe, Automotive Stocks are particularly sensitive to tariff news.

On Monday, a basket of European automotive stocks briefly rose nearly 5% after a report by The Washington Post, which stated that Trump's aides were considering imposing import tariffs only on key imported goods, but this basket of automotive stocks fell again after Trump denied the report.

This volatility highlights investors' sensitivity to the already sluggish automotive industry, whose stock value has dropped by a quarter since peaking in April 2024, and the relative valuation has significantly decreased.

Emmanuel Cau, head of Barclays European Stocks Strategy, indicated that he is focusing on one of the consumer sectors heavily affected by trade. Others include staples, Luxury Goods, and industrial products. Over the past six months, a basket of European stocks most affected by tariffs from Barclays has fallen about 20%-25% relative to major markets.

The weak economy in the Eurozone may also prolong the underperformance of European stocks. The Stoxx 600 Index rose 6% in 2024, while the S&P 500 Index surged 23%.

3. The Canadian Dollar is fluctuating.

Since Trump threatened to impose a 25% tariff on Canada and Mexico last November unless they took action against drugs and immigration, the Canadian dollar's exchange rate has dropped to its lowest point in nearly four years and may continue to decline.

Goldman Sachs Analysts believe the market may only be pricing the possibility of such tariffs at about 5%, although they think it is unlikely to be enforced, the prolonged trade negotiations may keep the risks present.

Pesole from ING stated that a full-scale trade war would require further interest rate cuts from the Bank of Canada, potentially pushing the Canadian dollar to USD exchange rate to 1.50. This means a further depreciation of nearly 5% from the current level of about 1.43. The resignation of Canadian Prime Minister Trudeau further complicates the outlook.

4. The volatile Mexican peso

At the time of Trump's election, the exchange rate of the Mexican peso against the USD had already dropped by 16%, and many news items (favorable to the USD and unfavorable to the peso) have been priced in.

The peso dropped 18.6% in 2024, marking the worst annual performance since 2008. In addition to the tariff threats from the USA (with 80% of Mexican exports going to the USA), controversial judicial reforms have also affected the currency.

Tariff news on Monday (later denied by Trump) caused the peso to surge by as much as 2%, only to give back its gains, highlighting that as trade at the southern border of the USA remains a target for Trump, the peso's volatility may continue.

Since mid-2024, major Latin American currencies have been depreciating, with the Mexican peso being the hardest hit.