The euro rose slightly in early Asian trading due to a new trade deal between the EU and the US. The EUR/USD reached around 1.1770 before settling at about 1.1750/55. The trade deal has several key points: – A 15% tariff ceiling on EU goods entering the US – A $750 billion commitment from the EU to purchase US energy – A $600 billion EU investment in the US – No stacking tariffs Reactions in the EU were mixed. Finland criticized the deal, while Germany’s trade group called it a “painful compromise.”

Currency Markets Overview

In currency markets, the AUD, GBP, and NZD all made small gains. Meanwhile, USD/JPY and USD/CHF stayed within narrow trading ranges, keeping overall currency volatility low. Stock and crypto markets also saw slight increases, showing stronger risk sentiment. US-China trade talks are restarting in Stockholm. While no major breakthroughs are expected, the likelihood of extending the current tariff truce is high. Japan’s $550 billion investment plan in the US relies mainly on loans and guarantees, with just a small part in direct equity. In the Asia-Pacific region, stocks showed mixed results: – Australia’s S&P/ASX 200 rose by 0.24% – Hong Kong’s Hang Seng increased by 0.48% – Japan’s Nikkei 225 dropped by 0.88% – The Shanghai Composite gained slightly by 0.03% The euro’s modest response to the trade deal suggests it will stabilize within a range. While the deal lessens some risks, differing EU responses and undefined details will likely prevent any major price increases. With the Cboe EuroCurrency Volatility Index (EVZ) trading near multi-year lows, we see selling options premiums through strategies like iron condors on EUR/USD as a profitable approach.

Market Volatility and Strategy

The overall low volatility in the market seems likely to continue, especially with the expected 90-day extension of the US-China tariff truce. This stability lowers risks, making it attractive to bet against equity volatility. We suggest selling VIX futures or buying put options on volatility funds as long as this calm continues. For stocks, the trade deal offers minor relief for European exporters. However, comments from the BGA reveal ongoing economic pressures. Recent figures show the German Ifo Business Climate Index has dropped for five straight months, supporting a cautious outlook. Thus, we recommend buying short-dated call options on European indices for a tactical rebound rather than betting on a major uptrend. The anticipated truce in Stockholm is crucial because trade between the US and China topped $690 billion in 2022. This stability is vital for market sentiment and should support currencies like the Australian and New Zealand dollars. We believe long call options on the AUD/USD pair are a smart way to benefit from this easing of trade tensions. Clarification from Akazawa about Japan’s investment plan likely contributed to the drop in the Nikkei. Markets adjusted to find that much of the investment was not as impactful as initially suggested by the White House, focusing on debt and guarantees rather than direct equity. This creates a value opportunity to go long on US energy sector ETFs while potentially shorting Japanese equity index futures. Create your live VT Markets account and start trading now.

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