Carnage. Donald Trump kicked up a storm over the weekend by imposing tariffs on Canada, Mexico and China, effective as early as Tuesday. It goes without saying that financial markets have been going haywire since the announcement and as trading begins in earnest this morning things may escalate further. Mind the gap. As expected, there has been an immediate reaction in currencies. The Dollar is currently on a rampage and is causing mayhem on the usual pairs; DXY up 1.2% at the time of writing. The Euro experienced a rude awakening this morning, opening with a huge gap to the downside near $1.02. Worth bearing in mind that Trump has also threatened the EU with similar tariffs. The Canadian Dollar took a predictable hammering this morning, USDCAD currently fighting to remain below 1.48. Cryptocurrencies were similarly quick to respond, getting obliterated across the board. Bitcoin has been decimated over the weekend, suffering a solid 10% loss and plummeting to lows of $91k this morning. Needless to say, the reaction in the lower caps has been even more devastating. A sea of red. As for precious metals, gold has retreated from recent all-time highs, falling to $2,775 this morning after seeing a record $2,817 an ounce on Friday. A busy start to the week no doubt, but in all likelihood the drama is far from over. Manufacturing and services PMIs dominate the economic calendar early this week, after which the Bank of England will announce its latest interest rate decision on Thursday. It all culminates on Friday with the latest round of NFP data, but traders would do well to remember that geopolitical developments could steal the show at any time.
United States Dollar A boring but essential answer. The United States Dollar is the world’s reserve currency and will remain so for the foreseeable future. The mighty Greenback is the default means of payment for almost all international trade. The Dollar’s supremacy is incontestable even without a Trump presidency, but with DJT at the helm market participants can expect the Dollar to be wielded more aggressively than usual. One part of the equation is the difference in interest rates between the Dollar and other currencies. As of the time of writing, rates on the Dollar are 4.5%. In contrast, rates on the Euro are around 3%. The rate on the Japanese Yen has just been adjusted to 0.5%. Put simply, the ability to earn higher interest on the Dollar makes it more attractive. A large part of the Dollar’s ascendency over the past four months is due to interest rate differentials. This is worth bearing in mind when the US government starts calling for aggressive rate cuts. Slashing interest rates would weaken the Dollar, whereas maintaining them at the current high levels ensures demand remains strong. Tariffs are the second part of the equation. Higher tariffs and the threat thereof will have a significant impact on the Dollar over the coming years. There are many mechanisms at play here, but suffice to say that every time the administration appears to soften its tone on tariffs, the Dollar tends to lose out against competing currencies. The first week of Donald Trump’s presidency saw significant declines in the Dollar, in no small part because expected tariff announcements failed to materialise. More generally, the fact is that commodity markets are denominated in Dollars. Whether traders are looking at gold, oil or anything else, the Dollar is on the other side of the trade. Best to keep an eye on it. Crude oil More so than most other markets, the price of oil is heavily grounded in reality. The world consumes millions of barrels of oil every single day, which means that supply and demand dynamics dictate everything. Reduced production, disruptions in the supply chain, sanctions and tariffs will quickly and inevitably increase the price of crude oil. On the other hand, faltering demand will rapidly cause prices to fall. Because of this, oil markets are some of the more susceptible to geopolitical events. As we saw throughout last year, every development in the Middle East prompted an immediate response in the price of crude oil. News items relating to attacks on refineries in the Russia-Ukraine conflict had a similar impact. Talk of sanctions and tariffs against oil-producing nations will no doubt feature prominently in international relations over the next few years, but one of the more overlooked elements is the demand side of things. Unfortunately, industrial production is down across the globe, meaning demand for oil is also on the decline. European manufacturing in particular has been hit hard in recent times, ironically in part because of higher local energy prices due to embargoes against Russian oil and gas. The Chinese economy has also exhibited some fragility in recent years. Cracks are even starting to appear in the United States. Should worldwide demand continue to fall, crude prices may follow suit. Economic growth is practically synonymous with higher oil consumption. The interconnectedness and relevancy of oil markets ensure they will remain at the forefront of any political or economic shift. Not to be overlooked. Cryptocurrencies The incoming administration has been abundantly clear on its stance on cryptocurrencies. The response from the crypto markets has been equally unambiguous. Bitcoin is up 50% since the election. Exchanges have seen huge inflows. Ross Ulbricht is out of prison. Calls for deregulation are ringing out loud and clear. The Securities and Exchange Commission has been difficult to contend with in recent times, to put it mildly. But change is in the air. Former chair of the SEC Gary Gensler is long gone and his replacement, Paul Atkins, although still awaiting confirmation, could not be more diametrically opposed to the outgoing team. The last few years were some of the darkest in the history of crypto. Stifling and confusing regulations crippled the fledgling industry just when it needed guidance the most. Many voices in the scene repeatedly begged for greater clarity, only to receive nothing but punitive measures in response. On top of that, the period was marred by the worst scams, hacks and scandals we have ever seen. The losses from the collapse of FTX alone reached into the billions. Utterly unforgiveable. All signs are pointing to the bad times drawing to an end. Many developments that have been held back until now are waiting to be unleashed. Interesting times ahead. Artificial Intelligence During his first week in office, President Trump announced the Stargate Project. The project intends to invest $500 billion over the next four years in AI infrastructure in the United States. The announcement alone triggered a flurry of buying activity in the tech companies most likely to benefit from such an investment. Chip manufacturers are likely to remain under the scrutinous gaze of investors with deep pockets. Nvidia (NVDA) shares almost tripled in price in 2024 alone and the company now stands shoulder to shoulder with the largest tech giants in America. The rise was largely fuelled by anticipated advancements in the AI sector. An argument could be made that the hype surrounding Artificial Intelligence is somewhat unjustified, time will tell. Pledges of such magnitude cannot be ignored however. There is something of an international arms race developing when it comes to AI, particularly between the US and China. Shortly after the announcement of Project Stargate, Chinese startup DeepSeek surprised everyone by releasing an open-source version of its AI model that supposedly competes with the best of what Silicon Valley has to offer. Even more surprisingly, the model was trained at a fraction of the cost of its US counterparts. Much like with the cryptocurrency industry, there is a certain amount of scepticism among large swathes of the general population when it comes to AI. There is certainly nothing wrong with being sceptical, but as any savvy investor will know, it is always worth keeping tabs on where the money is going.
The year of the snake is upon us; time to shed bad trading habits. Yesterday, US stock markets made a decent show of recovering from the fallout of the massive sell-off in Nvidia (NVDA) shares that occurred on Monday. For those who missed it, Chinese start-up DeepSeek surprised the world by releasing an open source version of its AI model that supposedly competes with the best of what Silicon Valley has to offer. More importantly, the company trained the model for a fraction of the price of its competitors. The news prompted a half-trillion Dollar loss in Nvidia’s market cap, the assumption being that the hardware requirements for AI endeavours are not as high as previously thought. GPUs not needed. Nvidia plunged 17% by Monday’s close, dragging the Nasdaq Composite and S&P 500 down along with it. By the end of Tuesday’s session however, both indices had managed to undo much of the damage. Nvidia shares closed at $129 yesterday, down from highs of $153 three weeks ago. As for the rest of the financial markets, things are somewhat tame in comparison. The Dollar gained some strength yesterday, the DXY rising half a percent to just under 108. Currency traders are bracing for back-to-back announcements from the Bank of Canada and the Federal Reserve. The former is expected to shave a quarter percent off the current 3.25% whereas the latter is expected to remain steadfast at 4.5%. Of course, it is not all about numbers. Today marks the Fed’s first interest rate decision under the Trump administration and markets will be keen to gauge the general sentiment among board members.
The Dollar weakened considerably last week as markets began to question the resolve behind trade tariff posturing. The DXY suffered its worst week since last November, falling the better part of 2% to the mid-107 range. Despite president Trump’s repeated calls to address the trade imbalance, market participants have been waiting for something a little more concrete. Judging by the recent events in Colombia, the wait may be over. The USD made a stand early this morning and the Dollar Currency Index is up 0.2% at the time of writing. Despite everything, interest rate traders have cemented their prediction of zero change during the next Fed meeting on Wednesday. Gold was all too happy to capitalise on the weakness exhibited by the Greenback, climbing to within a few Dollars of its previous all-time high. The precious metal rose to $2,770 an ounce by Friday’s close, just shy of the record $2,790 from last October. Weakness in the Dollar aside, the uncertainty surrounding tariffs and sanctions is also a contributing factor to the rise in gold. Safe-haven inflows are back on the menu. The Lunar New Year is just around the corner so trading conditions may be somewhat off this week. Chinese markets will be closed from tomorrow until next Monday. Not much on the economic calendar today or tomorrow but on Wednesday both the Bank of Canada and Federal Reserve will convene to establish interest rates on their respective currencies. The former is expected to lower rates on the Canadian Dollar down to 3% from 3.25% whereas the Fed is expected to keep rates steady at 4.5%. The ECB follows on Thursday and is expected to lower the deposit facility rate on the Euro down to 2.75% from 3%. The big event on Friday is the publication of the PCE price index, the Fed’s preferred inflation metric. If the first week of Donald Trump’s presidency is anything to go by then the second should make for equally exciting times. Worth keeping an eye on ongoing developments, particularly those relating to tariffs.
President Trump remains centre stage. It has been an exciting week, politically speaking, from executive orders to various announcements, financial markets have had a lot to keep up with. The Stargate project was one such announcement, an ambitious plan to invest $500 billion over the next four years into cutting edge AI infrastructure. The announcement was welcomed with open arms by US stocks, culminating in the S&P 500 reaching a record high yesterday. The Dow and Nasdaq are not far behind either, the latter now only a hair’s breadth from its previous all-time high. Yesterday, during a remote address to the World Economic Forum in Davos, President Trump called for Saudi Arabia and the wider OPEC cartel to lower oil prices, claiming artificially high crude valuations were fuelling war efforts in Ukraine. Crude prices have taken a sizeable step down since the yearly highs last week. Brent is now hovering around $77 a barrel and WTI is down to $74. Oil markets are likely to remain pertinent during the next few years, as sanctions and tariffs levelled against oil-producing nations will continue to affect supply and demand dynamics. Not to mention the possibility of the US ramping up its own production domestically. During the same speech, Trump also demanded that interest rates be slashed immediately. Just how much sway the president has with the Federal Reserve is a never-ending topic of debate, but the odds of a rate cut next week have not budged, remaining at essentially zero for any kind of reduction. On the topic of interest rates, the Bank of Japan elected to hike rates on the Yen by 25 bps to 0.5% this morning, the highest rate the Yen has seen since 2008. Not much of a reaction in USDJPY so far; the call appears to have been universally expected. The bullish momentum seen in gold markets this week continued this morning. The precious metal rose to $2,777 early on in the Asian session, bringing it to within touching distance of the record high established in October last year.
Today is the day. In a few hours, Donald Trump will be sworn in as the 47th president of the United States. Although US markets are closed, traders would do well to stay alert for any unexpected developments or announcements from the incoming administration. Market participants should be habituated to this by now, but expect the unexpected. Any mention of tariffs or trade wars or even any cryptocurrency related announcements could violently swing the needle. The economic calendar is more or less empty for the day so all eyes are on the incoming president. For those who missed the drama over the weekend, Donald Trump released his very own meme coin on Saturday, aptly named “TRUMP”. The token, released on the Solana blockchain, initially sold for around $10 before reaching over $70 on Sunday, briefly pushing it into the top 15 largest market caps in the cryptocurrency sphere. Ethics of the token release can be debated ad nauseum, but the message is clear: the new administration is vocally pro-crypto. The Dollar appears stable this morning, the DXY remaining comfortably above 109 despite a minor drop in early trading hours. As already mentioned, the NYSE is closed today so nothing going on there. On Friday, the Bank of Japan will have to come to a decision on the next interest rate target for the Yen. Traders are currently predicting a 25 bps rise to 0.5%. A lot of money rests on the difference in interest rates between the Dollar and the Yen, in fact the last time the BoJ intervened markets went absolutely haywire.
