Friday forex follies: Bessent’s balancing act caps a wild week in FX

What a week! Tariff threats turned into a high-stakes game of whack-a-mole, switched on and off at Trump’s discretion, keeping markets in a constant state of alert. Meanwhile, Scott Bessent’s laser focus on the 10-year Treasury yield has traders second-guessing every move, with long-end rates taking center stage in Trump’s broader economic strategy.

Adding to the mix, the Bank of England delivered a clean 25bp cut, serving up a dovish aftertaste that has markets pricing in at least three more cuts this year. The ECB is also stepping into the spotlight, set to release a report on the neutral rate, which could provide crucial insight into how far and how fast European rates could fall.

But the real test? Payrolls Friday. After a rollercoaster week of shifting macro narratives, the jobs report could be the ultimate decider—either reinforcing the Fed’s patient stance or shaking up expectations entirely.

There is plenty to digest, and as always, the market’s next move will depend on which landmine goes off first.

While markets may have shrugged off tariff noise, there’s been a stealth loosening in the financial condition via the bond market worth watching. The spread between the 10-year Treasury yield and the 10-year SOFR rate has narrowed to 43 basis points, down from the 50bp highs we saw at the turn of the year. On the surface, this might seem like an academic footnote, but in reality, it's a key indicator of how the market is digesting U.S. fiscal risk.

The logic here is straightforward: SOFR represents the risk-free curve, while Treasury yields must carry an additional spread to reflect U.S. credit risk—a spread that tends to widen in times of fiscal stress. The fact that this premium surged beyond 50bp in late 2024 was a red flag, signaling concerns over the expanding fiscal deficit and ballooning debt levels.

But here’s where it gets interesting—that spread has since compressed, partially due to falling long-end Treasury yields and Scott Bessent’s yield-management strategy. The big question now: Is this a real trend, or just temporary noise? If markets believe fiscal discipline is improving—perhaps through DOGE or a pivot in spending—we could see Treasury yields grind even lower, pulling the SOFR-Treasury spread down further. But if not? Expect a sharp snapback higher, bringing yields along for the ride.

The payroll setup

Markets are bracing for a Goldilocks payrolls print, one that keeps the economy on steady footing without forcing the Fed’s hand. A 175k headline number, paired with unemployment at 4.1%, should be enough to avoid recession jitters while keeping the rate-cut narrative at bay. If the data lands close to expectations, Treasury yields likely won’t have a clear reason to move significantly lower—at least not based on this number alone.

The Fed’s stance remains firmly on hold, and a report like this would do little to change that. With dots implying only cautious cuts in 2025, Powell & Co. need a more decisive slowdown to pivot aggressively. That said, it’s the revisions that could steal the show.

I’ve adjusted my book accordingly—back long USDCNH, still short EURUSD, and reloaded long USDJPY on a Tokyo fix dip. I was tempted to flip short dollars and lean into the revision risk, but a well-placed whisper number has me second-guessing that move. If this source is on the money, the payroll revision might not be the 800k bloodbath the BLS hinted at—but rather something softer, more manageable.

If that’s the case, the dollar could find fresh legs as traders who bet on a more dramatic revision unwind their positions. But if the revision does come in heavy, expect a knee-jerk dollar selloff, at least initially.

Either way, this isn’t a sleepy NFP—it’s a pivotal moment that could set the tone for the next leg in rates, FX, and risk assets.

Bessent’s balancing act

Scott Bessent’s mission is nothing short of an economic high-wire act—orchestrating a policy package that fuels growth without unleashing an inflationary inferno. The challenge? Two cornerstone Trump 2.0 policies—curbing immigration and slapping tariffs—both come with inflationary baggage. So unless U.S. production surges well beyond expectations and the DOGE initiative delivers in spades, inflation risks remain front and center.

During the campaign, "drill, baby, drill" was tossed around as a magic bullet for inflation control, but let’s be real—oil prices are the master key to long-term inflation expectations, directly influencing 10-year Treasury yields. If Bessent wants to steer the yield curve in the right direction, he’s going to need more than a soundbite—he’ll need tangible results.

But here’s the kicker: Bessent’s job gets a whole lot easier if the government can rein in spending. And this is where his full-throated praise for Elon Musk’s Department of Government Efficiency comes into play. Through the Bessent-Trump lens, Musk’s role in streamlining government operations is far more significant than most financial media pundits currently give him credit for.

And the market is starting to take notice. The tightening spread between 10-year Treasuries and SOFR rates—now down to 43bp from 50bp—suggests growing optimism in U.S. fiscal policy. Translation? Markets are slowly coming around to Musk’s efficiency crusade.

This isn’t just about flashy rhetoric—it’s about hard numbers and market sentiment. If Musk’s efficiency drive delivers, if Bessent keeps Treasury yields in check, and if production ramps up fast enough to outpace the inflationary headwinds from tariffs and immigration controls, Trump’s economic vision may just pull off the impossible—growth without runaway inflation.

Elon Musk’s financial acumen is unparalleled, making him arguably the most qualified individual on the planet when it comes to handling money—not just because he has more of it than anyone else, but because he has repeatedly demonstrated an uncanny ability to create, scale, and optimize wealth across industries. From revolutionizing electric vehicles and space exploration to shaking up social media and AI, Musk has built empires where others saw roadblocks.

With his libertarian-leaning views and track record of streamlining operations, many Americans—even those who might not align with his politics—expect that if anyone can shine a light on government waste and reckless spending, it’s him. His no-nonsense approach to efficiency, cost-cutting, and disruption could make him a nightmare for bureaucratic bloat and an unlikely ally for fiscal conservatives eager to expose pork-barrel spending and excessive government largesse.

Love him or hate him, Musk is not a man who tolerates inefficiency, and if given the right platform, he could force Washington to confront some hard financial truths that politicians on both sides have long preferred to ignore.