By Michael O’Neill

Markets are in Transformer mode. They dispensed with the depths of despair in the immediate aftermath of Trump’s ‘Liberation Day’ and have wholeheartedly embraced a high-octane, nitro-fueled blend of hope and hype about “The Golden Age of America.”

All it took was a face-saving retreat dressed up as economic diplomacy between China and the USA. Both sides agreed to roll back their most recent salvos in the trade war. The U.S. slashed its tariff barrage from an embargo-like 145% to 30% on Chinese goods, effective May 14 through August 12. China returned the favour, cutting its retaliatory tariffs on U.S. imports from 125% to 10%. The pause helps to avoid a summer of rising costs, disrupted supply chains, and lowers the risk for a global economic slowdown.

Wall Street liked what they heard. The S&P 500 jumped 3.3%, the Nasdaq ripped higher by 4.4%, and the VIX dropped below 20 for the first time in two months. Treasury yields popped, with the 10-year flirting with 4.5%, as investors rotated out of safe havens. The U.S. dollar caught a bid across the board, as tariff risk unwound and risk sentiment improved.

The celebration around the 90-day tariff pause kicked into overdrive with Tuesday’s US inflation report. Headline CPI (2.3% y/y) ticked lower than forecast and markets reacted like Powell just announced a 50 bp rate cut. The US dollar tanked, and stocks soared.

But this time, it is NOT different.

The underlying issues—tech transfer, state subsidies, fentanyl precursors, expanding Chinese territorial claims—haven’t been resolved. And China isn’t the only issue. The European Union, Japan, and even Canada will not meekly submit to Trump’s blackmail and threats. It’s the kind of moment that would make Neville Chamberlain whisper “Peace in our time”—right before the tanks roll in.

U.S. retailers are rushing to import Chinese goods while tariffs remain tolerable. But China still faces a 30% levy—and despite Trump’s denials, it is a tax. (Oxford defines a tax as a compulsory contribution to state revenue.) Chinese exporters don’t pay it; American importers do. And those importers won’t absorb the cost—they’ll pass it on, which means higher inflation.

April Inflation Data Fake News
The market reaction to Tuesday’s US inflation report was a head-scratcher despite many economists warning that the data was stale and did not reflect the impact of tariffs. The results may have been better than the forecasts, but the more important core-CPI reading was not better than the March result. And that means Fed Chair Jerome Powell isn’t any closer to cutting rates today than he was on May 7.

The Myth of a US Dollar Devaluation
Trump has repeatedly blamed the strength of the US dollar for persistent trade deficits, claiming it is “killing our exports.” He probably got the idea from his Chair of the Council of Economic Advisors, Stephen Miran’s November. Miran wrote, “The root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade.” That essay formed the basis of the Mar-a-Lago Accord gossip.

Now, every time there is a dollar sell-off, talk of a Mar-a-Lago accord surfaces.

It’s a myth. The Mar-a-Lago Accord is a tongue-in-cheek reference to the 1985 Plaza Accord, which was a concerted effort by West Germany, France, the UK, and Japan to weaken an overvalued US dollar. The greenback had soared as a result of tight monetary policy, loose fiscal policy, and global demand for U.S. assets, which forced Washington to pursue coordinated devaluation before it crushed the export economy.

The odds of that occurring again are slim.

For starters, the necessary coordination is not happening. Relations between the Trump White House and major U.S. allies—Germany, Japan, the European Union, Canada—are chilly at best. These countries have no incentive to revalue their currencies higher, especially in a Trump tariff-war environment.

Moreover, interest rate differentials still favor the dollar, and the Fed is in no rush to slash rates.

Canada Threatened
The ripple effects in the “Great White North” are significant. Canada was hit with 25% tariffs on steel and aluminum and 14.5% on lumber, and those levies have not been repealed or reduced. In addition, all goods not covered by the US-Canada-Mexico Agreement (USMCA) on trade face a 10% levy. Tariff talks have not really started in earnest due to the election, but Dominic LeBlanc, Minister responsible for Canada-US trade, will pick up the file and continue his work.

The Canadian dollar enjoyed a Trump Liberation Day surge and rose over 4% between April 2 and May 6. Then reality intruded. The Canadian economy is on life support. The employment market is dismal, with layoffs being announced almost daily, and inflation shows signs of reheating. The Bank of Canada is likely cutting rates by 25 bps on June 4, while the Fed will leave its benchmark rate unchanged at 4.5% at least until September. In that environment, USDCAD is locked in a 1.3750-1.4250 band.

Markets may think they’ve got Optimus Prime at the wheel, but one wrong macro move, and we may see Decepticon-level correction.