Can–U.S. ‘Trade Rupture’: Part 2

Some headlines make this look like a trade tantrum. It’s not.

What we’re watching instead is a contest over leverage — who has it, who’s bluffing, and who can credibly absorb pain if things go sideways.

Canada’s recent China trade announcement and the subsequent Davos speech weren’t accidental. They were signals. And signals, in geopolitics and markets alike, matter more than the absolute size of any single deal.

Along these lines, global bond markets are flashing stress signals that have little to do with Canada–U.S. trade and a lot to do with capital flows, currency confidence, and debt sustainability. That undercurrent will likely outlast this trade drama — and affect Canadian households more directly.

On January 16, Canada announced a modest trade arrangement with China, allowing 49,000 electric vehicles per year into the Canadian market — small relative to Canada’s overall auto market, but symbolically important. The move partially unwinds tariffs that were originally imposed in coordination with U.S. policy and opens China’s market to Canadian canola and fish exports, with meaningful regional impacts in the Prairies and Atlantic Canada.

Initially, the U.S. reaction was muted. Donald Trump was even on record saying that “Canada should make a deal with China.”

Then, just 2 days later, came the World Economic Forum.

In a speech that was widely heard by the global community, Carney framed the global moment as:

The room applauded. Washington did not.

Within 3 days, Trump threatened 100% tariffs on Canada should it proceed with its Chinese trade deal.

From some perspectives, this looks reckless. Poking at the world’s largest economy — repeatedly — is rarely a best practice.

But there is a plausible strategic logic here.

Carney appears to have taken a page from Trump’s own playbook: bring the threat forward.

Instead of letting tariff threats loom over Canada heading into CUSMA renegotiations in summer 2026, the confrontation is happening now. The thinking may be simple:

In other words, we can be threatened now, or we can be threatened later — but at least now the cards are on the table.

This approach gives Canada flexibility:

That said, it’s a strategy that carries risk. Canada is not negotiating with a fully rational counterparty, and public escalation narrows off-ramps. Mexico’s quieter approach looks boring — but boring can allow time and flexibility to adjust and diversify economically before taking bolder steps.

There’s also a political layer. A confrontational posture can distract from weaknesses here in Canada. But if the ‘distraction theory’ is true, and this trade move backfires economically, the political cost could be severe.

While Davos grabbed headlines, the Japan carry trade quietly impacted global markets more substantially.

In simple terms, the carry trade involves borrowing cheaply in Japan (where rates have been near zero for decades) and investing elsewhere at higher yields. That only works if Japanese yields stay low and the yen stays weak.

This week, that assumption continued to crack faster as Japanese bond yields surged

The ripple effects were immediate:

That combination matters. A falling dollar and rising yields signal that markets are saying: “We’re reducing exposure.”

This compounds U.S. instability at exactly the wrong time. When global funding markets wobble, credibility matters — and this credibility is under considerable strain.

Some experts and the financial markets expect the surface level, attention grabbing drama to cool eventually. But every episode — tariff threats, geopolitical bluster, and absurd claims — leaves a residue. That residue shows up in bond markets, the USD, and precious metals like Gold and Silver.

As of Monday, January 26, Canadian bond yields and interest rates haven’t reacted in step with the media drama of last week. In fact, not even close.

As seen during the first round of trade threats, financial markets look past the noise and towards the objective likelihood or odds of outcomes. Currently, markets are saying that the odds of a trade catastrophe for Canada are relatively low.

This is not a moment for heroic trades. It’s a moment for structural alignment. We approach this idea using our core and explore portfolio model.

All-in-one equity portfolios like XEQT or VEQT form the entire core and remain well positioned, particularly due to their diversified Canadian and global equity exposure. Specifically, the TSX’s heavy weighting toward:

Offering exposure to inflation-resilient sectors. While also heavily weighted in the S&P500, AI and technology, should we see a rebound later in 2026.

Holding short-term liquidity (money market or very short-term bonds) allows flexibility. The goal isn’t maximizing the income yield — it’s optionality.

Bonds aren’t necessarily ‘bad’ right now, but longer-dated bonds (5+ years) can be deceptively volatile in this environment. For conservative/stable components of portfolios:

Canada’s trade theatrics matter — but they are not the main event.

The deeper story is about capital flows, credibility, and debt-heavy systems adjusting to a higher inflation, and likely a higher interest rate world. That adjustment is uneven, uncomfortable, and often mispriced in real time.

For smart Canadians, the response is not fear — it’s diversification, discipline, and humility about forecasts.