FX alert: Axis vs Allies 2.0 – Currency markets reprice a fractured world

Market wrap

The reaction across trading floors was instant — and euphoric. Champagne popped, risk screens lit up green, and it felt like everyone exhaled at once for a hot minute. But after the high-fives came the hangover question: Now what?

Because the game has changed.

We're no longer dealing with a tariff tantrum — this is full-blown global economic realignment. Call it what it is: Axis vs Allies 2.0, and the gloves are off.

This isn’t your garden-variety trade war. This is a strategic reshuffle where the White House is rolling out the red carpet for friends and slamming the door shut on Beijing’s runaway export machine.

Let’s not sugarcoat it — China’s had a 20-year free ride. Cheap labor, scale advantages, and a well-documented appropriation of U.S. intellectual property helped turn them into the factory of the world. But that model? It just got kneecapped.

Trump’s tariff play isn’t random — it’s a tactical pivot. Hammer China, ease up on partners. It’s carrot and stick, front and center. Play ball and get rewarded. Sit out and get smoked. That’s the new script.

And as the champagne settles, markets now need to recalibrate to this new world order. Because make no mistake — the next chapter is already being written.

The top-of-book risk for China isn’t U.S. tariffs alone — it’s alignment. A 100%+ tariff from the U.S. hurts, but it’s survivable. What’s not? A coordinated front.
If Trump corrals allies into a unified trade stance, China faces something far worse: a global tariff wall. That’s the real Trump endgame.

Even as the Trump administration tries to spin this as some kind of premeditated political win, let’s be real — the bond market carnage forced the backpedal. As I said earlier, I don’t really care about the politics. That stuff belongs in headlines, not on the trading desk.

What matters now is that we can finally get back to trading the market with a bit more leash. That said, after last night’s rocket move in New York, I’m inclined to let the next round of tariff headlines tape find a middle ground in negotiations before I lean too far into broader risk — especially equities. For now, my eyes are squarely on the dollar. If there’s a real shift in the “Sell America Inc.” narrative, the FX tape will tell us first.

Today I’m feeling a bit more expressive with my FX views — still running a barbell book, long and short dollar across the edges, but gold once again proving to be my central backstop. It’s been the steady hand through the noise. That said, it’s probably a "let the dust settle" kind of day before I get the whole trade sheet singing in unison. Alignment’s coming — maybe tomorrow.

Forex markets

You know it’s been wild when the basis trades start trending on social media. Mind you, most tweeting them have no idea what they are and are just filling the echo chamber — that’s the market’s modern-day version of hearing your pipes rattle at 3AM. It’s one of those metrics nobody talks about... until something’s breaking.

The real “yippiness” — as Trump cheekily dubbed it — didn’t just light up equity screens. It detonated in the bond market. From the opening ticks in Asia to the stroke of midnight when the 104% China tariff kicked in, the 10-year yield exploded 60 basis points higher. That’s not just a rate move — that’s a scream from the plumbing.

And it was breaking. Traders were ditching Treasuries and paying up through swaps just to stay liquid — classic “Sell America Inc.” vibes. But that spear? Feels like it just got blunted.

Spreads are calming. Funding stress is backing off. The tape’s breathing again. And if that holds, the dollar — which got clipped in the chaos — might start finding its legs. Old-school correlations could reassert. One to watch.

Meanwhile, China’s still knee-deep in its National Team gymnastics — backstopping equities, massaging sentiment, and pumping out the same tired “stimulus is coming” headlines to prop up the illusion of calm. It’s optics over substance — the façade of stability while the engine sputters underneath.

Behind the smoke and mirrors? The PBOC’s quietly torching 100’s of millions in USD through state bank intermediaries just to keep the Yuan from cracking wide open. This isn’t price discovery . They’re force-feeding the market manufactured calm, and every day they hold the line just ratchets up the eventual unwind risk.

Let’s be real — CPI still can’t climb above zero, and deflationary price pressures are baked in across the board. Add the fresh wave of tariffs into that mix, and in any open-market currency regime, the Yuan would be in freefall by now. But instead? Crickets.

It’s not stability. It’s suppression.

And the longer they play this game, the bigger the tail risk when gravity finally kicks in. Call it what it is: a farce with a fuse.

Gold market

Gold exploded higher — up 3.3% to $3,082 into the COMEX NY close — logging its biggest one-day gain since 2023, as bullion traders flipped the switch from defense to offense. This wasn’t just a hedge; it was a signal. With the U.S.-China trade war hitting a new gear, Asia desks piled in, lifting gold another $40 and dragging spot right back to near record highs.

Crucially, we’re no longer seeing gold sold to cover losses elsewhere. That correlation broke. Instead, gold is now getting outright bid as a pure play on fiat devaluation risk.