Trade Wars and Fed Policy: How to Profit in Volatile Markets with Short-Term Treasuries and Commodity Currencies

The global economy is at a crossroads. U.S. trade tensions, stalled negotiations, and the Federal Reserve's cautious stance have created a perfect storm of uncertainty. In this high-inflation, low-growth environment, investors face a critical choice: hunker down in defensive assets or seize asymmetric opportunities in short-dated Treasuries and commodity-linked currencies. Here's why the latter strategy could be the winning play.

The Trade War's Toll on Global Yields

The U.S. trade agenda has become a blunt instrument of economic coercion. As of May 2025, the threat of 50% tariffs on EU goods and the looming July deadline for Vietnam's 46% tariff have stoked global market anxiety. These policies have two immediate consequences:

1. Slowing Global Growth: J.P. Morgan estimates tariffs could shave 1% off global GDP, with spillover effects potentially doubling the damage.
2. Rising Volatility in Bond Markets: The Fed's “wait-and-see” approach—holding rates until September 2025—has left short-term Treasury yields artificially stable while long-end yields gyrate.

The disconnect is stark. While the 10-year Treasury yield flirted with inversion (currently at 3.79%), short-dated Treasuries (1-3 years) remain a haven of predictability.

Currency Volatility: A Commodity-Backed Opportunity

The Fed's reluctance to act has strengthened the U.S. dollar, but this dominance is fragile. Commodity-linked currencies like the Australian dollar (AUD) and Canadian dollar (CAD) are poised for a rebound—if you time it right.

Why Commodity Currencies Will Outperform

1. Energy and Metals Resilience: Despite China's manufacturing slowdown, iron ore prices remain anchored by infrastructure stimulus plans. Copper's dip to $9,420/tonne is a buying opportunity, not a death knell.
2. Geopolitical Leverage: Countries like Australia and Canada are not party to the tariff wars, giving their currencies asymmetric upside if trade tensions ease.
3. Central Bank Divergence: While the Fed holds rates, the Bank of England and ECB have signaled easing cycles. This policy gap will eventually weaken the USD.

The Salmon Trade Secret

Norway's krone (NOK) is another sleeper play. Despite a 13.7% YoY decline in salmon prices (due to overproduction), the NOK has weathered the storm. Why? Norway's fiscal buffers and its $1.4 trillion sovereign wealth fund ensure stability. A rebound in seafood demand—or a China trade deal—could spark a sharp rally.

The Investment Playbook: Short Treasuries + Commodity Currencies

1. Short-Term Treasuries (1-3 Years):
2. Why Buy? These offer 5-6% yields with minimal duration risk. The Fed's pause ensures they're “safe” until 2026.

3. Trade: Use ETFs like SHY (iShares 1-3 Year Treasury Bond ETF) for liquidity and diversification.

4. Commodity-Backed Currencies:

5. AUD: Linked to China's energy needs and Australia's iron ore dominance.
6. CAD: Canada's oil exports and lumber prices are undervalued relative to U.S. demand.
7. NOK: A contrarian bet on Norway's fiscal resilience and eventual China trade normalization.

Risks to Avoid

• Prolonged Tariff Wars: A China-U.S. deal collapse could trigger a liquidity crisis.
• Fed Overreach: If inflation spikes again, the Fed might hike rates, squeezing both bonds and commodities.

But the odds favor this strategy. The Fed's caution and commodity cycles' inherent resilience mean now is the time to act.

Final Call to Action

In a world of trade wars and central bank hesitation, short Treasuries and commodity currencies are your best armor. The data is clear: short-dated bonds offer yield stability, while AUD/CAD/NOK provide a leveraged bet on global recovery.

Deploy capital now—before volatility resets.

This analysis assumes no material changes in geopolitical dynamics or central bank policies. Consult a financial advisor before making investment decisions.