A trade war just got a bit less likely

Published on January 21, 2025

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Adam Button from ForexLive spoke with BNNBloomberg on Trump's first day in office and spoke about some of the early takeaways.
The first market move of Trump's second Presidency was: US dollar weakness.
It was a sharp move on a report -- later confirmed -- that Trump won't be initiating any tariffs to begin his term. The main lesson in that -- and I think we've learned this before -- is that Trump's bark is worse than his bite. There was fear this would be a more-unhinged version of Trump but so far he's looking like the same guy.
So here is what we've learned.
1) Noting to upset the stock market
Our baseline playbook for Trump is the same as the first time: The stock market is priority #1, along with growth. Efforts to balance trade and the deficit are second and third.
A tariff war is a big risk to equities and so long as countries can credibly threaten to retaliate, then tariffs may never be fully implemented. Stanley Druckenmiller today said he thinks the US could get away with a 10% across-the-board tariff. I'm not so sure but it will depend on how other world leaders respond.
2) Tech is ascendant

The front row of Trump's inauguration didn't feature powerful lawmakers or allies. It featured his family and the top tech titans, including Zuckerbeg, Bezos, Pichai and (of course) Musk. Tim Cook was earlier seated at churce with Zuckerberg and Bezos.
It's a sign that tech will hold nearly-unfettered power in the administration, so long as they hold the ideological line. That should be great for profits but a key person to watch will be Cook. Apple is trying to move some manufacturing out of China but that's a monumentally-difficult task given Chinese expertise and supply chains.
3) Energy is a real priority
The Trump administration sent out a document today highlighting its priorities and high on the list was energy, which dominated one of the four sections. This is something that Trump has been saying since he was elected and it's an alignment with AI and independence goals. One of the lines from the priority list was this:
Trump will declare an energy emergency and use all necessary resources to build critical infrastructure
That's a tradeable theme that's not new but I still believe it's early and I believe it bodes well for everyone involved in any kind of energy, whether foreign or domestic.
4) Immigration moves not as harsh as feared
The administration document says "President Trump will take bold action to secure our border" and that will include sending troops and deportations of 'criminals'. There is nothing here on mass deportations and that aligns with the idea that Trump doesn't want to upset the economy. The bottom line is that an underclass of illegal, low-wage workers is good for business.
5) Confusion in crypto, open season on fraud
The launches of $TRUMP and $MELANIA are a low point for the President and for crypto in general, including the decision by Robinhood to list the Presidential grift. It's starting to look like it will be open season on financial fraud, which is a troubling development for anyone who believes in capital markets. I fear the signals it's sending particularly for young people who looking to work hard and invest. I'm not sure that's the path to prosperity in this economy.

USD/CAD touches the lowest since December 17 after tariff reprieve

The Canadian dollar has been a big mover today, trading in a 220 pip range. The pair rose to the highest of the year earlier at 1.4485 on fears that Trump would enact Day 1 tariffs on Canada of up to 25%, sparking retaliation and a trade war.
However a WSJ report highlighted that Trump will only sign a memo asking to investigate trade practices from Canada, Mexico and China. That's the best-case scenario so far, though with Trump everything is subject to change.
In light of the report, USD/CAD fell sharply and hit 1.4262 at the low. That's back to December 17 levels, though the pair has since bounced to 1.4327.
Part of the reason for the bounce is uncertainty about what's really coming. Canada and others won't avoid a trade dispute for four years so it's tough to embrace it or any other currencies that are in the crosshairs. That said, it's a great start.
Also restraining the loonie here is a $1.42 drop in WTI crude to $76.46. Oil has been building in a tariff premium as buyers stuff pipelines and tankers trying to get ahead of potential tariffs. There was also some threat of Canada and/or Mexico cutting off supplies in response to tariffs.
As for what's next, we wait for the next Trump headlines but I think it's a good sign of an interim bottom for the loonie. Trump had months to think about tariffs on Canada and I don't think he's going to change his mind tomorrow (though the threats will continue).

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