Global equity markets are rising after the US and Japan announced a trade deal. The agreement includes US tariffs on Japanese goods set at 15%, down from the previously suggested 25%. Japan has committed to buying US planes and rice and may create a large sovereign wealth fund for investments in the US. Meanwhile, industrial metals are gaining popularity, benefiting currencies like the Australian dollar, Brazilian real, and South African rand.

US dollar struggles

The US dollar is struggling, with recent losses possibly due to a shift in investments towards Europe and Emerging Markets. There’s anticipation for the upcoming June existing home sales report, which could indicate good news for the housing market. Commodity-related currencies might serve as protection against unexpected changes in US financial policies. The currency market remains complicated, highlighting the diverse financial activities happening worldwide. We see this trade agreement as a key driver for increased market optimism. To take advantage, we are buying call options on broad equity indices that are closely linked to global growth. The S&P 500 has already risen over 4% in the past month, and we believe this upward trend will continue. The rise in industrial materials, with copper trading above $4.50 per pound, signals stronger economic activity. This supports our strategy of investing in commodity-linked currencies through derivatives on the Australian dollar. Historically, the AUD/USD exchange rate has closely followed base metal prices during times of global growth, showing a strong positive correlation of over 0.7.

Preparing for growth in the housing sector

Given the US dollar’s struggles, we are looking at put options on the U.S. Dollar Index (DXY), which is nearing important support levels. The index has recently sat around the 104 mark, and a significant drop could boost the shift in asset allocation we’ve mentioned. Recent data from the Institute of International Finance revealed that emerging markets attracted over $30 billion in portfolio inflows last month, confirming that capital is moving away from dollar assets. We are also preparing for the anticipated strength in the housing sector. The latest data from the National Association of Realtors showed a slight decline, but median existing-home prices increased year-over-year, indicating steady demand. Thus, we believe call options on homebuilder ETFs could benefit from positive surprises in June’s sales figures. For those heavily invested domestically, we recommend using options on the highlighted commodity currencies as a useful hedge. If US financial policies tighten unexpectedly, it could pressure local equities and bonds. However, a long position in the Brazilian real or South African rand would likely do well in that situation, given their ties to the global materials rally. Create your live VT Markets account and start trading now.

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