US: Diminishing returns
It was almost a foregone conclusion that the US administration, hyper-focused on midterms and affordability, would ultimately retreat from policies threatening to shatter the housing market or financial stability. We are hearing distinct echoes of last May’s backpedaling. By now, the playbook should be familiar to every market participant: push to the brink, then pivot.
While the contagion risk from the JGB selloff distinguished this specific moment, the broader dynamic remains the same. The tactical use of tariff threats and incendiary rhetoric continues to serve as a lever for President Trump, who appears to have pulled a “framework” for Greenland out of thin air. We have no details on this deal, nor any military intervention, yet markets are palpably relieved. We can view the latest market tantrum in the rearview mirror as the VIX completes its roundtrip from 16 to 20 and back again.
However, guard against complacency. While the tactical lever works, it risks diminishing returns. One of the key takeaways from this week’s market revulsion is the warning issued by Citadel’s Ken Griffin: the heavy selling of Japanese government bonds should serve as an “explicit warning” to the US. While the US enjoys the privilege of reserve currency status that Japan lacks, the fiscal parallels are becoming impossible to ignore, and the bond vigilantes can strike back again.
Furthermore, geo-economics has become an inescapable reality, as the weaponization of trade and finance to pressure both allies and adversaries on non-economic fronts calcifies into a structural volatility driver for policymakers and market participants alike. This shift is not confined to Washington; recent European threats to weaponize U.S. Treasury holdings underscore a global trend toward financial brinkmanship. Yet, as much as that rhetoric garnered enthusiasm for “standing up to the bully” and striking where it hurts, it rang hollow against the deafening reality of the Eurozone’s own balance sheets. For a bloc facing record net issuance of over €800 billion in 2026, engaging in a bond war represents fundamentally suicidal math, as they remain far more dependent on American capital than they can afford a protracted financial conflict. Ultimately, the systemic risk is not that Europe aggressively liquidates its current holdings, but that they simply cease to be the marginal buyer, triggering a silent capital strike
The accumulation of “unintended consequences” from escalating tariff drama and global posturing creates a precarious environment. While the structural ‘run the economy hot’ from the US thesis remains in play, the thinning trust premium is evident in the relentless bid for Gold.
History has repeated itself. Once again, the initial shock has faded, rhetoric has moderated, and investors view this week’s volatility as another entry point as the dust settles. With the US Dollar stabilizing ahead of next week’s politically loaded Fed meeting, the market seems ready to climb the wall of worry once more, at least for now.
Canada: A courageous stroke of geo-economic arbitrage
Prime Minister Carney certainly commanded the headlines this week with a defiant address at Davos. His strategy of acknowledging a fragmented world and overtly diversifying away from “old friends” has undeniably catalyzed a bounce in the polls. But the question now—perhaps even more profound than the immediate polling sugar high—is how this pivot will mechanically impact the looming CUSMA renegotiations.
Let’s be clear: US-Canada relations have likely hit their nadir. While the government’s attempt to diversify the economy is strategically sound on paper, the pivot has yet to materialize in the hard data. Operationally, it is agonizing; reorienting a G7 supply chain is not the work of a single news cycle. So, while the public cheers the rhetoric, the grim reality remains: the fate of the trilateral regional economy hangs in a delicate balance.
One could argue that Carney is making a calculated bet: that President Trump’s rhetoric is constrained by election-year dynamics, and that his “51st state” bluster has lost its bite. In this view, Carney’s move to effectively “trade Detroit for the Dragon“—courting Chinese trade ties while calling out American bullying at the WEF—is a courageous stroke of geo-economic arbitrage.
But this is a high-stakes gamble. Does Canada actually hold the cards to outmaneuver Trump ahead of the critical July review? The risk is that this pivot doesn’t create leverage but rather invites retaliation or even a total rupture of the CUSMA framework.
Furthermore, a foreign policy victory is a fragile shield against domestic decay. If the economic data for the first half of 2026 fails to support Carney’s narrative, the optics may shift rapidly. If Canada continues its structural deceleration while food inflation remains the highest in the G7, the Prime Minister’s international boldness may soon be framed as a distraction from domestic mismanagement. The stakes could not be higher.
For the immediate term, however, eyes return to monetary policy. Next week’s Bank of Canada meeting appears, on the surface, to be a lull—a “hold” decision has been discounted for weeks and validated by recent data. Yet, this speaks volumes about the Bank’s momentum. They are caught between an economy unresponsive to prior stimulus, a pipeline of critical infrastructure projects that are yet to be launched, and a sticky inflation backdrop that demands continued caution.
Meanwhile, the USD/CAD has surrendered some ground on tariff-threat relief as the greenback recovers partial weekly losses. November retail sales, due this Friday, are unlikely to move the needle for the next BoC decision, but they will add critical texture to the narrative. They will reveal whether the Canadian consumer was merely cautious or fully tapped out heading into the holidays—a leading indicator for just how much “diversification” the domestic economy can actually withstand.
GBP: Sterling’s bounce meets macro reality
The de-escalation in geopolitics tensions has helped the British pound recover some losses against the euro and safe-haven currencies. However, although the overall impact on FX was noticeable it has been unremarkable. GBP/USD still holds steady above $1.34, ending yesterday flat, whilst GBP/EUR has bumped into resistance at its 21-day moving average, struggling to reclaim €1.15.
Outside the geopolitical noise, the UK delivered a run of notable data this week. A steady unemployment rate supports the case for patience before cutting rates, while slowing wage growth across both ex‑bonus measures strengthens the argument for bringing cuts forward. The mixed inflation report didn’t shift Bank of England pricing, leaving markets broadly unmoved.
With fewer than two cuts priced for 2026, market expectations still look too conservative, setting a low bar for a dovish surprise. That leaves the pound vulnerable to rates‑driven weakness if incoming data continue to validate the BoE’s disinflation narrative.
Meanwhile, stress in the long end of the bond market remains an important dynamic to monitor. Over the past year, the USD, GBP, and JPY have been the three developed‑market currencies most prone to negative correlations with long‑dated yields — and they were also the worst‑performing G10 currencies earlier this week as the surge in Japanese yields spilled over into global bond markets.
This pattern points to fiscal concerns, rather than broad risk sentiment, becoming a more influential driver of FX behaviour. Markets appear increasingly sensitive to economies where long‑end yield stress intersects with questions around fiscal credibility, leaving those currencies more vulnerable when rates move sharply.
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Calendar: January 19-23
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
