Renewed tensions between the US and China have caused stocks to drop, while the USD has strengthened. President Trump’s threat to impose tariffs on China’s rare-earth exports has fueled these tensions. As a result, global stock markets are weak, bonds are performing better, and gold has hit a record high of $4,150. This uncertainty is boosting the USD, while higher-risk currencies are struggling. Recent data shows a strong correlation of 76% between the S&P 500 and the Mexican peso (MXN). However, the Swiss franc (CHF) has a negative correlation of 37% with US stocks. Current market actions mirror these trends, with the Australian dollar (AUD), Norwegian krone (NOK), and MXN showing declines, while the Japanese yen (JPY) and CHF are performing better. The USD is close to its recent peak, suggesting possible short-term gains, despite long-term challenges from the Federal Reserve’s rate policies.

US Government Shutdown’s Impact

The US government shutdown adds to economic uncertainty as layoffs of federal workers have begun. If this trend continues, it could harm the USD. With little significant data released today, focus shifts to speeches from various central bank officials, including Fed Chair Powell, along with upcoming consumer price index (CPI) and producer price index (PPI) reports from China. We are witnessing a familiar scenario reminiscent of trade tensions in the late 2010s. New conflicts with China, particularly regarding semiconductor supply chains, are reducing investors’ willingness to take risks and pushing them toward safer options. The CBOE Volatility Index (VIX) has risen from 15 to over 19 in just a month, reflecting this uncertainty.

Safe Haven Assets Performance

This “risk-off” climate is once again boosting the U.S. dollar, similar to what happened during past tariff disputes. The Dollar Index (DXY) is now trading near 106.50, supported by safe-haven inflows and a favorable interest rate differential for the U.S. This makes it wise to consider further dollar strength against riskier currencies. Safe-haven assets are doing well, with gold recently surpassing $2,450 an ounce. While some past analyses from the Trump era noted record highs, the peak in 2019 was around $1,550, highlighting how today’s prices are considerably higher amid new geopolitical concerns. We are also seeing capital flow into the JPY and CHF, which traditionally perform well during market stress. Commodities and related currencies are experiencing weakness, as seen in the past. “Dr. Copper,” a key indicator of global economic health, has dropped 4% over the last thirty days due to concerns about slowing industrial demand. As a result, high-beta currencies like AUD and MXN have underperformed. Given this situation, derivative strategies should focus on protecting against further declines in stocks and taking advantage of rising volatility. Buying put options on major indices like the S&P 500 can offer downside protection. At the same time, call options on gold and long positions in the USD against commodity currencies seem wise for the upcoming weeks. Create your live VT Markets account and start trading now.

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