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As Donald Trump was sworn in for his second term as President, U.S. stock market futures soared, fueled by anticipation of bold executive actions expected to invigorate the economy. Yet, in a twist that calmed nerves across global markets, President Trump revealed he would not, contrary to expectations, roll out new tariffs immediately. Instead, his initial move involves a directive for federal agencies to critically evaluate current trade policies and economic relationships, with a keen focus on China, Canada, and Mexico.

This strategic directive mandates a thorough review of adherence to the U.S.-Mexico-Canada Agreement and the 2020 trade deal with China. While Trump continues to prioritize rectifying U.S. trade deficits and combating what he perceives as unfair trade and currency practices, his initial approach signals a more tempered and deliberate pace than many anticipated..

This nuanced stance marks a noticeable shift from Trump’s historically aggressive trade policies, highlighting internal debates within his administration. While figures like Treasury Secretary nominee Scott Bessent push for targeted tariff applications, other advisors advocate for more comprehensive trade barriers. This internal discord reflects the broader uncertainty and evolving strategies that defined the administration's trade policy direction at the start of Trump's second term.

As we embark on the first full trading day under President Trump's renewed leadership, the financial markets are poised for a bullish start. On his first day, consistent with a Wall Street Journal article which had hit the dollar earlier in the day, there were no Day One tariffs. The President took a tempered approach and issued a sweeping trade directive that notably did not include the immediate tariffs on China, Canada, and Mexico he had previously championed. This careful stance marks a departure from his earlier aggressive trade rhetoric and has significantly lifted investor morale, infusing a refreshing sense of optimism across global markets.

Even though the U.S. stock and bond markets shuttered on Martin Luther King Jr. Day, the currency markets buzzed with activity, witnessing the dollar's dramatic plunge by 1%—its steepest fall since August. This sharp decline mirrors the widespread relief among investors, as the President is seemingly pivoting towards a more diplomatic and strategic stance on trade policies, easing fears of immediate harsh tariffs and nurturing a cautious optimism in global financial circles.

Today's decline unfolds against a backdrop of extensively stretched U.S. dollar positions, as highlighted by the latest Commodity Futures Trading Commission data, which revealed a net long dollar position amounting to $35 billion last week—the largest seen in nearly a decade. Given these heavily lopsided positions, this morning might not be the opportune moment to re-enter long USD positions in a big way, as we could witness further corrections given the imbalance. The notable absence of trade policy in President Donald Trump’s inauguration speech may catalyze another downward leg adjustment in the dollar.

Since September, the dollar's robust ascent and the spike in U.S. Treasury yields have tightened global financial conditions, particularly impacting Asian and emerging markets. However, with signs pointing to a potential easing of these conditions, the pressure valve appears primed to release further this morning, offering a breath of fresh air to these markets. This shift heralds a more accommodating environment as Trump's revised policy agenda begins to unfold, possibly easing the strain on global markets and heralding a more favourable climate.

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