moonypto的OANDA:USDCAD的The Trade War Escalates | Trump’s Tariff Gamble

The Trade War Escalates | Trump’s Tariff Gamble

Tariffs, Retaliation and Market Volatility, What Investors Need to Know..

When the S&P index opened with a strong positive candlestick on Friday morning, traders had no idea that crucial documents were being transmitted from Washington, setting the stage for a dramatic shift in globalization. With a single official document, the Trump administration escalated the U.S. trade war to a level akin to the nuclear deterrence strategy of “mutually assured destruction.”

Contrary to my earlier expectations of a relatively moderate tariff scenario, the outcome was far more severe. Instead of selective increases, a sweeping tax hike was imposed across the board, with the energy sector being the sole exception. Canada, refusing to back down, swiftly retaliated with a 25% countervailing tariff on $155 billion worth of U.S. goods.

This triggered the US tariff cross retaliation clause, indicating a deepening conflict. The belief that Canada would quickly yield has significantly diminished. Meanwhile, China and Mexico have both threatened countermeasures but have yet to announce concrete actions, leaving a slim possibility for de escalation.

Markets had previously underestimated the likelihood of broad tariffs. Since Trump had not implemented the tariffs he originally vowed to enact on his first day in office—even after nearly two weeks—and instead initiated a Section 301 investigation (which could take months or even a year), analysts assumed the tariffs were merely a negotiation tactic. The assumption was that their actual implementation was still months away.

CNN’s analysis offers an insightful perspective, showing how verbal communication and vague policy expectations contributed to the widespread disbelief in a full-scale tariff hike. This also explains why the market failed to price in such a development.

Last week, U.S. stocks rebounded sharply, with indexes recovering to high levels, confirming that markets had not factored in the potential impact. Ironically, a market dip last week—rather than a rebound—might have been healthier. It wasn’t until late Friday that investors began taking the risk seriously, leaving no time for appropriate adjustments. The subsequent sharp decline in currency markets over the weekend suggests the market is finally acknowledging the severity of the situation, albeit belatedly.

A market downturn is now inevitable—U.S. stocks are likely to gap down, and both stocks and bonds will slide on Monday. If gold also drops, it could signal a liquidity crisis and potential overselling, which may present a buying opportunity.

China is less affected compared to U.S. allies since it already imposes tariffs averaging 20–30%, meaning an additional 10% increase is relatively minor. However, for Mexico and Canada, where average tariffs are in the single digits, the marginal impact is far greater, likely leading to steeper declines in their stock markets.

Further reinforcing expectations of prolonged tariffs, Trump has publicly urged Americans to "tighten their belts." If tariffs remain in place without signs of constructive negotiations or responses from other nations, markets may increasingly view them as a permanent fixture—intensifying negative reactions over time.

Looking ahead, optimists should monitor three key areas: first, any progress in trade negotiations with China, Mexico, and Canada; second, potential court injunctions in the U.S.; and third, whether Trump introduces counterbalancing measures like deregulation, liquidity support, or tax cuts (such as reductions in personal income tax) to alleviate economic concerns. Any of these could help stabilize markets.

Regarding the legal angle, Trump invoked the “International Economic Emergency Powers Act” (IEEPA) to justify the tariffs. This law not only allows the president to adjust tariffs at will but also grants authority to freeze foreign assets, even across borders with the cooperation of other nations. Such an aggressive application of IEEPA could accelerate global economic decoupling from the U.S. and damage the long-term credibility of the U.S. dollar.

Since IEEPA has historically been used for economic and financial sanctions rather than import tariffs, affected U.S. businesses may challenge it in court. While the judiciary is likely to back the president, the coming days will test Trump’s authority and could introduce additional market volatility.

Some believe this differs from Trump’s past attempts at unilateral policy changes, such as his unsuccessful executive order on birthright citizenship. This trade dispute is an external conflict rather than a domestic political issue, making judicial intervention less likely. However, the possibility isn’t zero. Some speculate that Trump and the courts might be playing a strategic game encouraging legal challenges from U.S. businesses so that courts can temporarily halt tariffs, maximizing pressure on foreign governments while minimizing domestic economic fallout. Though unlikely, it remains a possibility.

Mexico's president says new U.S. tariffs on Mexico will be suspended for a month starting today, Mexico has reached a series of agreements with the Trump administration, including sending 10,000 Mexican National Guard troops to reinforce its northern border to combat drug trafficking.

Regardless, this situation warrants close attention any developments could trigger a sharp market rebound. Personally, I’m increasingly convinced that Trump aims to use tariff revenue to offset reductions in personal income tax. Given that the US operated without a personal income tax a century ago, Trump may believe the economy can still thrive without it

交易進行

China's State Council said it would impose additional tariffs on some imported goods originating from the United States starting February 10, 2025. Trump's spokesman said Trump will speak with Chinese President as early as this week to seek an agreement that could avoid a wider trade war

交易結束：目標達成

The markets have been pretty dull over the past two weeks, despite the ongoing back-and-forth on tariffs between the U.S., Canada, Mexico, and China, along with tariffs on U.S. steel and aluminum imports. Traditional finance markets haven't managed to pick a clear direction.

Looking at multiple indicators, there's no sign of panic on Wall Street. Credit yields are still low for the cycle, and credit spreads between investment-grade and junk bonds haven’t widened. The VIX is stable at 16, suggesting that market participants have already bought enough protection against further negative news.

Fed Chair Powell’s Senate testimony reinforced the Fed’s “wait-and-see” approach on rate cuts, indicating the pace of cuts might slow in 2025. Despite this hawkish stance, the U.S. Dollar Index (DXY) hasn’t seen a significant rally.

Looking at CFTC data, it's clear that the market is heavily long on the dollar. With interest rate differentials also suggesting the USD is overvalued, that could explain why DXY has had trouble gaining momentum. Given that much of the bad news seems priced in, the USD may face more downside risk. Any positive news could trigger a rush of USD longs unwinding their positions, potentially boosting risk assets. Tonight’s CPI release could be the spark that sends DXY lower.

However, this "rising tide" might not benefit everything. Bitcoin continues to lag behind equities and gold, pointing to some hesitation in the crypto market. Liquidity is still low across new listings, and last week’s massive liquidations wiped out a lot of traders.

For those holding long crypto positions, tracking institutional flows and buying downside protection may be the best strategy—especially since put options are still relatively cheap.