By Michael O’Neill

Checkpoint Charlie disappeared at the same time the Berlin Wall was toppled in November 1989. It was built in 1961, and it was the only place that foreign dignitaries and tourists could cross from West Germany into East Berlin. It was a nasty bit of political theatre played between two superpowers, the Soviet Union and the USA.

A similar drama is being played out in the Strait of Hormuz which is on the cusp of becoming Ayatollah Tollway.

Prior to Trump’s attack on Iran, all manner of shipping sailed through the Strait unimpeded and toll-free. Trump put a stop to that. The self-described master dealmaker and author of the book “The Art of the Deal” trumpeted the use of leverage to get an adversary to bow to his demands. The Iranians are showing Trump how it is done. They have effectively eliminated about 20% of the world’s daily oil supply by attacking shipping in the waterway.

As a result, oil prices remain elevated and inflation has risen high enough to force the world’s central banks to pivot toward tighter monetary policy.

Trump is desperate to escape this quagmire, which is why today, a senior official in one of the Arab states reportedly told CNN that there is a 50-50 chance of a deal by Friday. Iran and Oman have supposedly agreed on the coordinates for a “safe-shipping route,” which suggests that Trump has conceded some control of the passage to Iran.

Nevertheless, it is all rumours and speculation. Reports today, that Israel attacked Lebanon and that Yemen Houthis sunk a vessel in the Red Sea suggest optimism about a ceasefire is misguided. And the Middle East isn’t the only place where Washington has been trying to shape outcomes.

With Friends Like You

Treasury Secretary Scott Bessent insists last week’s coordinated U.S.-Japan intervention was about protecting regional stability. On CNBC he argued that “a stable yen is not only important for the U.S., but very important for the entire region,” warning that a weaker yen could pressure South Korea, China and others into competitive currency devaluations.

It’s a perfectly respectable G7 explanation. It’s also sketchy.

If Washington’s objective was simply to prevent excessive volatility in USDJPY, why did it pledge to do “whatever it takes?” Why confirm that Japan tapped the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) Repo Facility? Why lobby to expand that facility? And why use U.S. resources to help finance the intervention?

Follow the Money

The money leads to Tokyo. Japan holds roughly US$1.14 trillion in Treasuries. Had Tokyo financed last week’s intervention by selling those bonds, yields (meaning interest rates) would almost certainly have risen. Instead, the US government got involved and allowed Japan to use the Treasuries as collateral through the Fed’s FIMA Repo Facility, obtaining dollar liquidity without becoming a forced seller.

Bessent also revealed the U.S. sold euros to help finance the intervention, an extraordinary admission that Washington is prepared to use multiple tools to prevent a disorderly move ostensibly in the currency market, but his real concern is the Treasury market.

This isn’t about rescuing the yen or any of the major currencies; as Trump’s latest tariff barrage shows, America is not really concerned about the well-being of any of its former friends and neighbors. Just ask Canada.

Loonie-Pulled in Opposite Directions

Canada-U.S. yield spreads have become marginally more supportive for the Canadian dollar in the past few days. The two-year spread has recovered from around minus 145 basis points in late July to roughly minus 137 basis points, while the ten-year spread has narrowed from nearly minus 109 basis points to about minus 106 basis points. The move reflects the downdraft in US Treasury yields in the past five days, which knocked the 10-year yield down to 4.617% from 4.745%. Ironically, Bessent’s campaign to suppress U.S. Treasury yields may be one of the few things supporting the Canadian dollar.

But every silver lining has a dark cloud. For the loonie, it’s Section 338 and the never-ending CUSMA soap opera. Washington keeps threatening tariffs with one hand while dangling the prospect of a trade deal with the other. Until that changes, investors will be reluctant to make a sustained bet on the Canadian dollar, regardless of what Treasury yields are doing.

Check Point Charlie may become Choke Point Charlie if Trump’s tariffs move to the Gordie Howe Bridge.