Wednesday, 22 January 2025
by BD Banks
Trump has signed a series of executive orders aimed at reshaping US border and energy policies, as well as dismantling diversity programs within federal agencies. These actions, taken on his first day in office, include a declaration of a national energy emergency and directives to promote fossil fuel production (“Drill baby drill”), all while rolling back regulations established by the Biden administration… and he’s just getting started.
Trump also announced plans to impose 25% tariffs on imports from Mexico and Canada starting February 1, which has raised concerns in global stock markets. Furthermore, he intends to classify drug cartels as terrorist organizations and eliminate birthright citizenship for children born in the US to undocumented immigrants, signalling a significant shift in immigration policy.
Whenever tariffs are announced, one thing is almost certain: the US dollar tends to strengthen. Why? Because tariffs often create uncertainty in global markets, and investors flock to the dollar as a safe haven. But there’s more to it than just safety—tariffs can also drive inflation in the US, which may push the Federal Reserve to maintain or even tighten monetary policy. This expectation alone fuels demand for the greenback.
Take the Chinese yuan, for example. In past tariff wars, it weakened against the dollar as China’s export-driven economy felt the strain. The same goes for currencies in emerging markets—think of the Mexican peso or South African rand—which often bear the brunt of reduced trade flows and investor flight.
For traders, this means opportunity. A stronger dollar creates potential long positions against weaker currencies, especially those tied to economies heavily reliant on US trade. But tread carefully—diplomatic breakthroughs or unexpected policy shifts can reverse trends in an instant.
Tariffs don’t just stop at trade—they seep into commodity markets, creating ripple effects that can be both destructive and profitable for traders who know where to look.
Take crude oil as an example. When tariffs slow global economic growth, demand for oil tends to decline, putting downward pressure on prices. But oil markets are never simple—geopolitical factors like OPEC+ production cuts or regional conflicts can counterbalance these effects, creating volatility that traders can exploit.
Then there’s agriculture—a sector that often finds itself on the frontlines of tariff battles. During previous trade disputes with China, American farmers saw retaliatory tariffs on soybeans and pork devastate their export markets. Prices plummeted, only to spike again when tensions eased or government subsidies kicked in.
Industrial metals like steel and aluminium tell a similar story. When tariffs increase costs for manufacturers in importing countries like the US, demand for these raw materials can drop globally. But supply-side disruptions—say, from mining strikes or export bans—can flip this dynamic overnight.
For commodity traders, volatility is where profits are made. Watching economic data, geopolitical developments, and even weather patterns can provide critical clues about where prices might head next.
The stock market reacts to tariffs like a living organism—some parts thrive while others suffer. Broadly speaking, tariffs tend to hit sectors reliant on imported goods hardest. Think automotive companies that depend on foreign parts or retailers stocking shelves with overseas products. Rising costs eat into margins, and stocks take a hit.
But not all sectors lose out. Companies focused on domestic production or infrastructure—like utilities or defense contractors—often benefit from protectionist policies. For example, during Trump’s first term, steel producers initially saw their stocks rise after tariffs were imposed on imported steel.
For traders navigating equities during tariff turbulence, sector rotation is key. Shorting vulnerable industries while going long on those poised to benefit can yield significant returns if timed correctly.
In times of tariff-induced uncertainty, US Treasuries often become the go-to asset for risk-averse investors. This “flight-to-safety” dynamic drives up Treasury prices and pushes yields lower—at least initially.
But here’s where it gets tricky: tariffs can also stoke inflation by raising prices on imported goods. If inflation expectations rise significantly, bond yields could climb as well, reversing earlier trends.
Corporate bonds tell another story altogether. Companies reliant on imports may face tighter margins due to higher costs, increasing default risks for lower-rated bonds in sectors like retail or manufacturing.
For fixed-income traders, timing is everything. Riding the initial wave of Treasury demand can be profitable—but staying too long in this position without monitoring inflation risks could erode gains.
Cryptocurrencies like Bitcoin operate outside traditional financial systems—and that makes them an intriguing player during tariff disputes. When markets turn volatile or currencies weaken (think of the yuan during past US-China trade tensions), some investors turn to crypto as a hedge against uncertainty.
Bitcoin’s decentralized nature makes it appealing when trust in fiat currencies falters. And as institutional adoption grows, its role as a macroeconomic hedge becomes even more pronounced.
For crypto traders, tariff-induced chaos could present opportunities for price surges—but beware of extreme volatility and regulatory risks that could dampen enthusiasm just as quickly as it builds.
As we move into 2025 with Trump’s proposed tariffs looming large over global markets, here are some key takeaways for traders:
US tariffs aren’t just about trade—they’re about power dynamics that ripple through every corner of global financial markets. For traders willing to dig deep into these complexities and adapt their strategies accordingly, they represent both challenges and opportunities.
As a trader, the key takeaway for all forecasting speculations is “America First.” When looking across all asset classes, ask yourself a simple question, what market price action would be beneficial for the US economy?
The question isn’t whether tariffs will impact markets—it’s how you’ll position yourself when they do. To stay current on trading news and get deep dives into what’s behind today’s market shifts, visit the Exness blog regularly.
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