TACO Wednesday, but this time Europe is really hurt

Morning FX

As expected, Trump has once again "withdrawn" the news about imposing tariffs on Europe. At the Davos Forum held on Wednesday evening in the East 8th time zone, Trump stated that the previously threatened 10% tariff would be postponed, and that he would not seek to seize Greenland by force.

Image: Davos Forum, Switzerland

Instead, the US and Europe are likely to reach an agreement framework regarding Greenland, including sovereignty security, mineral resources, and military strategy, with mediation from several European leaders. Although the worst outcome was avoided, this framework may weaken European interests, and the original world order is now teetering.

I. The Davos Forum Opens a New World Order

The Davos Forum, which gathers political elites from many countries, is undoubtedly the grand opening of the 2026 world political stage.

Whether it was the debut speech of Canadian Prime Minister Carney or the closing remarks by US Secretary of Commerce Lutnick, neither attracted as much attention as Trump’s speech. Before he arrived at the Swiss Alps, all parties were deeply concerned about the Greenland crisis. But in the evening,Trump stated that he would not use force and confirmed this in his subsequent speech.

Image: Narcissistic personality Trump

After Trump began his speech, the atmosphere in the audience was complicated. Most people were not impressed by his self-aggrandizing remarks, but were somewhat tense about the possible assertion of sovereign threats at any moment.When Trump spoke about his family background, saying he had German and Scottish ancestry and loved Europe, but lamented that Europe was now on the “wrong path,” the audience knew the drama was about to unfold.

“Europe has a choice. You can say ‘yes’, and we will very much appreciate that attitude. Or you can say ‘no’, and we will remember your answer.” After the meeting, Trump announced on social media that a “future agreement” framework had been reached with NATO, but it was clearly America-first, includingstationing troops in Greenland and priority in mineral resource investments.

II. TACO Returns, Did Markets Already Expect This?

With both threats of force and tariffs canceled, risk sentiment quickly recovered. High-beta currencies led by the Australian dollar saw the largest single-day gains, reaching levels not seen since September 2024. The sell-off of US Treasuries also paused, with the 10-year yield falling 5bps to 4.25%.

Image: Australian dollar inversely correlated with VIX

Conversely, the euro, which should have benefited from the removal of the threat, declined against the trend. This is a lesson the market has learned from several TACO trades: “When Trump threatens, do de-dollarization trades immediately; when he withdraws the threat, go back to fundamentals pricing.” After nearly a year of Trump training, traders are now competing to move faster and think one step ahead.

III. Summary

(1) Trump repeated the TACO scenario at the Davos Forum, but his criticism of Europe remains, and the proposed agreement is also unfavorable to Europe. The world needs to adapt to a new order.

(2) The market is thinking ahead of Trump; de-dollarization narrative has paused and the euro has instead declined. After the alleviation of risk sentiment, high-beta currencies benefited, while the medium-term direction of the US dollar index became more uncertain. In addition, last night’s news of interest rate and reserve requirement cuts led to the closing of RMB long positions, with USDCNY rising by about 100 pips, which remains an opportunity for settlement at highs.