Trump’s Inauguration Day: Here’s what I’m looking for.

What I am look for on Inauguration Day:
The market has its finger on the trigger to react to what Trump delivers today – or at least, FX traders have their fingers on the trigger. Equity market volatility looks remarkably complacent in relative terms, an interesting disconnect.

The chief concern for currency traders as noted above is Trump’s approach to tariffs, as the market is almost entirely in the dark on what he will deliver today. Here is what I will watch for:

Broad versus targeted? If Trump announces broad tariffs against all trading partners, even at a relatively modest level of say 10%, this is the most immediate USD-positive and risk negative outcome. Watch for CAD and MXN to be hit very hard, with EUR perhaps underperforming the JPY and GBP underperforming EUR. There could also be an even worse mix of broad and targeted, with Trump singling out individual countries (China especially of note if so) or individual and large product categories for higher tariffs on top of the broad tariffs. This would exaggerate the above reaction.

If the tariffs are not broad and only targeted, the market reaction may prove a bit muddled until it sorts through the implications, as especially large tariffs against significant import categories or important countries of origination like China can still trigger significant unease.

Ratcheting of tariffs? One idea that has been floated by US Treasury Secretary nominee Scott Bessent is an approach of starting tariffs at low levels and chiefly using them as a negotiation tactic, promising to ratchet tariffs higher from a low starting point – or even starting them at zero – before ratcheting them higher by 2% or 5% a month until the desired policy change from the counterparty has been made. The market may take any “gradual increase” as a positive, but this would seem misguided, as the tariff would still rise to significant level. And of course, while Trump may not deliver all of the specifics in his inauguration speech today, we could get a mix of all three of the above: broad and targeted tariffs, some of which will ratchet higher with regular increases unless the target nation responds as desired.

It is an awkward time for global markets to absorb the message from Trump, as US equity and bond markets are closed, with hours for futures trading also partially restricted. Not everything Trump and his team are doing today will be in the speech, as there will be too many executive orders with specifics for Trump to deliver in a single speech, so we’ll have to stick close to the newswires to get the full scope of an historic Day One for a new US president.

And we’ll need Tuesday’s action to assemble a fuller picture of the full circle market reaction for rates and for risk sentiment, although we will inevitably spend weeks and months watching the reality on the ground unfold, including how the rest of the world responds to the US’ new policy mix.

I’ll be back tonight after Trump’s inauguration speech with further comments.