Chinese and US economic officials have set up a framework for a possible trade deal. This will be discussed by Presidents Donald Trump and Xi Jinping. The deal was reportedly agreed upon during the ASEAN Summit. It postpones Trump’s planned 100% tariffs on Chinese imports and gives another year for China to reconsider its rare earth minerals licensing. In response to this news, the Australian dollar rose by 0.37%, trading at 0.6537. A trade war usually means a serious economic conflict marked by heavy protectionism that leads to tariffs and barriers, increasing costs for imports and living expenses.

Background of the US-China Trade War

The US-China trade war started in 2018. The US imposed trade barriers claiming unfair practices, and China retaliated with tariffs. In January 2020, a Phase One deal was signed, requiring China to make specific economic changes. However, the COVID-19 pandemic shifted attention away from the trade war, and President Joe Biden kept many tariffs in place. Now with Trump’s return and a 60% tariff set for 2025, tensions between the US and China are increasing again. This new conflict is affecting global supply chains and pushing up inflation, especially impacting consumer prices. As the November 1st tariffs seem to be off, we can expect a big drop in market volatility. This reminds us of 2019, when positive trade news caused the CBOE Volatility Index (VIX) to drop sharply, often by over 10% in a single day. Traders might consider selling VIX futures or buying puts on volatility-tracking ETFs to take advantage of this expected calm.

Impact on Currencies and Equity Markets

The rise of the Australian dollar is likely just the start for currencies sensitive to global trade news. We remember how the offshore yuan (CNH) strengthened significantly against the dollar when the 2020 Phase One deal was signed. A similar rise from its current level of around 7.95 per dollar could happen. Traders might look at buying AUD/USD call options to capitalize on this momentum or selling USD/CNH calls to go against the dollar’s recent strength. Equity markets have been considering worst-case scenarios since January when the 60% tariffs were announced. This new news should boost a relief rally. US index futures, especially for the tech-heavy Nasdaq 100, will likely benefit as companies like Apple and NVIDIA face fewer supply chain risks. Buying out-of-the-money call options on indices like the S&P 500 can provide a leveraged way to take advantage of a potential rapid increase in the coming weeks. Besides broad indices, specific sectors that suffered during the trade war are now appealing. We can look back at the 2018-2020 period when shares of companies like Caterpillar and Boeing reacted strongly to trade news, as did agricultural products like soybeans. Call options on industrial ETFs or soybean futures could attract significant interest since China is the largest importer of these goods. Although the initial news is encouraging, the deal remains just a framework until Presidents Trump and Xi meet later this week. We recall how quickly sentiment shifted due to a single tweet between 2018 and 2020, turning rallies into sharp declines. Therefore, using defined-risk option strategies, like bull call spreads instead of simply buying calls, could be a wise way to handle possible reversals. Create your live VT Markets account and start trading now.

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