The trade deal between the US and Indonesia includes a 19% tariff on imports from Indonesia, while US goods entering Indonesia will have no tariffs. Indonesia is opening up its market to US companies more than before. The country has also agreed to buy US energy, agricultural products, and jets.

Strategy And Framework

Trump plans to use this agreement as a model for future deals. The goal is for importers to handle the costs of tariffs while gradually making adjustments to avoid driving up prices. This strategy aims to create a clear guideline focused on managing risks. It encourages thinking beyond just picking stocks. Instead, we need to assess derivatives that react to these major policy changes. Our first action should be in the foreign exchange markets. This type of deal will strengthen the U.S. dollar and weaken the Indonesian Rupiah. With the US already facing a trade deficit of over $15.8 billion with Indonesia in 2023—mainly from apparel, footwear, and rubber—this shift will put significant stress on the Rupiah. We should be looking to buy long-term USD/IDR call options to profit from the expected decline of the Rupiah as it struggles to pay for US goods while facing higher tariffs. This policy also opens up a traditional pairs trade opportunity in the equity options market. On one hand, we have clear winners: US exporters. We should buy call options on companies that will be fulfilling purchase orders for energy, agriculture, and jets. Companies in the S&P 500’s industrial and energy sectors are key players. Historically, Boeing’s shares increase when it secures large international orders. In 2023, U.S. aerospace exports hit $148 billion. A solid state-level purchase agreement will act as a strong driver for this. On the flip side are US businesses that rely on Indonesian manufacturing. We should purchase puts on specific retail and apparel companies that will find it hard to adjust to a 19% cost increase without losing customers.

Rippling Economic Effects

Finally, we need to anticipate the impact on inflation and interest rates. While there’s a plan to control this, the market will likely react regardless. For example, during the 2018-2019 trade disputes, the VIX, known as the market’s fear gauge, frequently shot up to above 25 when tariffs were announced. A similar increase in volatility is highly likely. We can set up trades using VIX calls or options on the ProShares Ultra VIX Short-Term Futures ETF (UVXY) to benefit from these expected fluctuations. More importantly, if these costs begin to affect the Consumer Price Index, the Federal Reserve will need to respond. Right now, the market is anticipating rate cuts, but this policy poses a real inflation risk. We should utilize options on 2-year and 10-year Treasury note futures to prepare for a “higher for longer” interest rate environment, balancing against the market’s hopeful view on falling inflation. Create your live VT Markets account and start trading now.

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