Trump’s 'big stick, then carrot' diplomacy ignites market rebound

Markets

In a classic case of “hit ’em with a big stick, then dangle the carrot” diplomacy, President Donald Trump has agreed to delay the 25% tariffs on Canada and Mexico for one month after a conversation with his counterparts on Monday. This dramatic U-turn came just as the neighbouring nations teetered on the edge of a full-blown trade war.

Now, markets are eyeing a convenient rebound as investors let out a collective sigh of relief that the draconian tariff threat—which had sent stocks tumbling and currencies scrambling for cover—has been put on ice, at least for now. Equities are roaring back, and FX markets are retracing much of the pre-tariff D-day hedging-driven chaos from Friday and Monday.

This latest twist suggests that Trump’s tariff threats are more bark than bite, likely used as leverage to extract concessions rather than outright economic punishment. But let’s be honest—we’ve already completed one full round-trip on this trade war roller coaster, and you have to wonder how many more times we can strap in before the market gets motion sickness.

With Trump’s unpredictability still looming, traders should stay nimble—because while the carrot is dangling today, the big stick could swing again tomorrow.

But if there’s one thing we know about Trump’s playbook, it’s that "The Art of the Deal" still holds weight. And let’s not forget—he keeps one eye firmly on U.S. stocks.

So, deal or no deal? That’s the million-dollar question markets will grapple with in the coming days. If a long-term agreement starts taking shape, expect risk-on momentum to accelerate, with stocks surging, the dollar recalibrating, and trade-sensitive currencies unwinding the trade war premium ( ~2 % on DXY)

But if this delay is just another head-fake, markets could experience another gut-wrenching whiplash, with volatility dialled up again. As always with Trump-era trade negotiations, the only certainty is uncertainty, and traders better stay light on their feet.

Asia markets

All the "Let’s Make a Deal" negotiations happening Stateside should inject some much-needed calm into Asian markets on Tuesday. After Monday’s brutal selloff, traders might finally get a chance to dust off their relief rally hats—assuming that Trump doesn’t drop another market-rattling bombshell in the next few hours.

With tariff tensions temporarily dialled down, we could see bargain hunters step in, fueling a solid bounce across equities and FX. But let’s not get too comfortable—Trump’s trade war twists are anything but predictable. A single tweet or policy shift could send the market back into risk-off chaos, proving once again that relief rallies come with an expiration date in this environment.

Still, given the longstanding correlation that rarely fails, when U.S. markets rally and the dollar softens, the wrecking ball effect on Asia’s risk markets eases—and that’s when the risk-on engines fire up.

The playbook is familiar: A weaker dollar relieves pressure on emerging market currencies, boosts commodity-linked assets, and gives Asian equities the green light to run. If this correlation holds, we should see a broad-based recovery across Asia’s risk spectrum, especially in high-beta plays like tech, commodities, and cyclicals.

Of course, this all depends on whether the U.S. equity rally has legs or is just another short-lived bounce in a tariff-fueled volatility cycle. But for now, the signal is clear: less dollar wrecking ball, more room for Asia to breathe.

Forex markets

Right now, the market is giving a standing ovation to any deal that helps dodge tariffs—and the price action says it all. The U.S. dollar is slipping, Treasury yields are climbing, and risk appetite is back on the menu. The playbook is simple: less trade war, more growth optimism.

But here’s the catch—don’t expect these correlations to hold forever. Markets are playing the hand they’re dealt, but in this high-stakes geopolitical poker game, the actual outcomes could flip the script in an instant. One minute we’re rallying, the next we’re spiraling—all it takes is a new twist from Washington.

For now, we’re back to square one, sitting on the edge of our seats, waiting for Trump’s next move. But tariffs aren’t the only game in town—it’s payrolls week. As we inch closer to Friday’s NFP report, the focus could shift fast, with traders forced to juggle trade war volatility and fresh U.S. labor market data.

Bottom line? The relief rally is on—but don’t get too comfortable. This market still has plenty of fireworks left.

The Euro

As the U.S., Mexico, and Canada inch toward a border deal, EUR/USD has ripped up to 1.0350, filling the technical gap we flagged in yesterday’s FX report. But before anyone gets too comfortable, the real question remains: Is the eurozone next in Trump’s trade war crosshairs?

For now, markets are adding fresh tariff risks to an already staggering list of eurozone growth concerns—from anemic economic momentum to a widening policy gap with the Fed. Upside catalysts? There are no upward catalysts in sight. The path of least resistance still leans lower, with traders increasingly shifting toward an ECB landing zone below 1.75% in the near term.

The euro will remain fragile without clarity on U.S. tariff threats against the EU. One wrong move in risk sentiment could send EUR/USD further lower before the dust settles.

The Yuan

No official word is expected from Beijing until Wednesday when it will reopen after the Lunar New Year holiday. But the first warning shots have been fired—China’s U.N. envoy Fu Cong hinted on Monday that Beijing could be forced to take retaliatory measures.

One widely anticipated countermove was a steep yuan devaluation, which would have neutralized much of the tariff impact by making Chinese exports cheaper. But here’s where things get interesting: The WSJ reports that yuan devaluation is off the table, signalling what looks like an olive branch to Washington.

This is a clear tell for seasoned interbank FX traders—Beijing is sending a message of restraint, mindful of its long-running reputation as a currency manipulator in U.S. eyes. The market reaction? Offshore yuan (USDCNH) has pulled back toward 7.30 as traders recalibrate expectations for China’s next move.

Beijing seems to be keeping its powder dry for now, but the market knows better than to rule out a strategic counterpunch once the holiday dust settles.