Financial markets opened the week on a cautious note, marked by renewed trade tensions and policy uncertainty. The US dollar firmed against major peers as President Donald Trump reiterated his hardline stance on trade, announcing that tariff letters will be issued as early as today. His threat to impose an additional levy on nations aligning with BRICS has reignited risk aversion, weakening emerging market currencies and weighing on industrial commodities. Meanwhile, oil markets retreated further after OPEC+ agreed to a larger-than-anticipated supply increase for August.
Investor sentiment remains fragile ahead of the July 9 tariff deadline. With the potential for asymmetric trade responses and varying national outcomes, volatility is expected to increase on a country by country basis, particularly for currencies exposed to trade flows and political alignment.
Trade Policy Escalation and BRICS Targeting
President Trumpās threat to impose a 10% tariff on countries āaligning with BRICSā significantly escalates geopolitical uncertainty. The move signals a growing bifurcation in the global trade system, targeting not only traditional rivals but also emerging market economies exploring multipolar frameworks.
While previous tariff threats have had limited follow-through, this development may have broader implications, particularly if it disrupts supply chains or slows cross-border capital flows. Countries such as Brazil, India, and South Africa Ā each with varying degrees of US trade dependency Ā could see heightened FX volatility in the short term.
Additionally, comments from Treasury Secretary Scott Bessent suggest that some US trading partners may be granted a brief extension to avoid immediate tariff enforcement. Nonetheless, the uncertainty surrounding enforcement and scope is likely to weigh on sentiment in risk-sensitive assets.
FX Market Implication:
- Expect increased volatility in BRICS-linked currencies (CNY, INR, BRL, ZAR) and in EMFX more broadly.
- Safe haven currencies such as the USD and JPY may remain supported in the near term.
- Countries negotiating exemptions or extensions could see asymmetric FX impacts depending on outcomes.
Commodity Markets React to Trade and Supply Shocks
Industrial Metals:
Copper and other base metals continued their decline following Trumpās trade comments. Industrial commodities remain particularly vulnerable to deteriorating global growth expectations, as additional tariffs could undermine demand from key manufacturing economies, particularly China and India.
Oil:
Crude markets were further pressured after the OPEC+ coalition unexpectedly agreed to a sizeable production increase for August. The 548,000 barrels per day addition brings forward the timeline for unwinding previous output cuts, raising concerns about a potential supply glut. This comes at a time when global demand expectations are being revised lower amid renewed tariff threats and softer macroeconomic indicators.
FX Market Implication:
- Commodity linked currencies (AUD, CAD) may remain under pressure from both weaker industrial metals and oil prices.
- USD strength could be compounded if commodity prices continue to decline, particularly against EMFX.
- Watch for divergences within commodity currencies based on exposure to oil (e.g., CAD) versus metals (e.g., AUD).
China-EU Trade Tensions Emerge
Chinaās announcement of new restrictions on medical device procurement from EU-based firms adds another layer of complexity to the global trade landscape. The move, coming as Beijing seeks to stabilise relations with the US, reflects shifting priorities and the strategic recalibration of Chinaās external policies. This could place the euro under mild pressure, particularly if the EU retaliates or negotiations stall.
FX Market Implication:
- EUR may see selective headwinds depending on the EUās response.
- CNH weakness may extend if trade tensions widen beyond the US-China axis.
Conclusion
Trade policy uncertainty has re-emerged as the dominant driver in global markets, with implications that extend well beyond tariff rates. President Trumpās threats targeting BRICS nations represent a potential pivot in US strategy that could amplify geopolitical fragmentation and weigh on global growth sentiment. Commodity markets are already responding, and FX markets are poised for volatility as negotiations evolve.
SARACEN MARKETS continues to monitor developments closely and anticipates increased differentiation across currencies based on trade exposure and policy responses. Traders should prepare for short-term dislocations while remaining focused on broader macroeconomic indicators for medium-term direction.