By Michael O’Neill
Trade agreements once signified stability—carefully crafted over years to foster long-term economic partnerships. They aimed to slash tariffs, protect intellectual property, uphold labor and environmental standards, and resolve disputes. By and large, they worked.
Then came Donald Trump. He views trade as a zero-sum game and is convinced that America has been “ripped off” for decades by freeloaders. Diplomacy was tossed in favour of tariffs, tweets, and theatrical “deals” that prioritize press releases over policy.
Tariff Theatre, Trump-Style
On April 2, Trump unveiled his “Liberation Day” tariff regime: a universal 10% tax on all imports, compounded by country-specific “reciprocal” tariffs starting April 9. Traders were not impressed. The S&P 500 plunged, shedding $6 trillion in value within four days. USDCAD surged in response, mirroring the broader investor panic.
Trump backpedaled quickly, announcing a 90-day pause on the reciprocal tariffs. The damage had been done and the TACO (Trump always chickens out) was named in his honour.
Deals Without Substance
With Trump’s self-imposed July 9 deadline for new trade deals fast approaching, not a single comprehensive agreement has been signed. Instead, we’ve seen vague frameworks, temporary pauses, and sector-specific exemptions wrapped in bluster.
Take Vietnam. On July 2, Trump blasted out a “HISTORIC TRADE DEAL” on Truth Social, promising zero-tariff U.S. access while Vietnam would pay 20% on exports and 40% on transshipped goods. There was no signing ceremony. The so-called deal adjusted specific tariffs—hardly a full free trade agreement. With U.S. exports to Vietnam at just $13.1 billion in 2024 (2.4% of total U.S. exports), even doubling the number wouldn’t move the economic needle.
The UK is still waiting. Talks remain stalled over agriculture, pharmaceuticals, and digital trade.
China? The Geneva talks in May followed by June meetings in London produced a “framework” to de-escalate the tariff war. Beijing agreed to accelerate rare-earth exports; Trump offered partial relief on tariffs. That’s it—no enforceable deal, no signatures.
Canada? After a temper tantrum over the Digital Services Tax, Trump threatened tariffs, and Ottawa blinked. Now Canadian dairy is in the crosshairs.
The Fed’s Rock-Hard Place Dilemma
Trump’s tariff campaign is boxing the Federal Reserve into a corner. May’s core PCE inflation rose to 2.7%, still above the Fed’s 2% target. Powell has kept rates steady, citing tariff-fueled price pressures and forecasting 2.8% inflation for 2025. That’s not a green light for stimulus.
Trump’s frustration boiled over. He sent Powell a handwritten note: “You should lower the rate—by a lot. Hundreds of billions of dollars being lost. No Inflation.” Powell ignored it and stuck to the Fed’s mandate of maximum employment and stable prices.
Political Pressure, Market Speculation
Now Trump’s hinting at naming Powell’s successor by September—eight months early. If markets suspect the Fed’s independence has been torched, expect inflation expectations and bond yields to spike. A Fed seen parroting Mar-a-Lago talking points will trigger serious volatility.
For USDCAD traders, the past few months have been a rollercoaster. The pair jumped on the April tariff shock, dropped when Trump paused, and now trades in limbo—caught between evolving Fed expectations and uncertainty over Canada-U.S. trade relations.
Sticky U.S. inflation and Powell’s hawkish tone should support the greenback. But markets are already pricing in three Fed rate cuts this year, pushing Treasury yields lower and triggering broad U.S. dollar selling. That’s weighing on USDCAD as a trade deal targeting Canada’s protected dairy industry looms.
A Fragile Market Rally
Equity markets are betting politics will override policy—that Powell will blink, or that his replacement will. Tech and AI names are leading a speculative rally. But this sugar high is fragile. Higher yields could crush valuations, rising costs are squeezing margins, and inflation continues to limit the Fed’s maneuverability.
This isn’t a rally built on strong fundamentals. It’s a gamble that Washington will trade economic discipline for short-term political gain.
What to Watch Now:
• July 9 Tariff Deadline – Without signed deals, expect more volatility and performative outrage if Trump misses his own deadline.
• Powell’s Future – An early replacement with a Trump loyalist could spark a bond selloff and push USDCAD sharply higher.
• Canadian Retaliation – Any countermeasures in response to dairy tariffs could accelerate Loonie volatility.
• Inflation Data & Rate Cuts – If inflation stays sticky, the Fed holds firm—bullish for the dollar unless Powell gets replaced.
Bottom Line
The S&P 500 may be soaring, but it’s running on fumes. Shrinking profits, sticky inflation, and White House interference are piling risk onto markets. Trade deals are more press release than policy, and the Fed is on the firing line.
For traders, this summer’s ‘framework fantasy’ may yet turn into a volatility horror show.
