During the European morning on July 8, 2025, the Reserve Bank of Australia (RBA) decided to keep its cash rate at 3.85%. This choice surprised many who expected a rate cut. The RBA is taking a careful approach, waiting to see upcoming inflation data before making any changes to monetary policy. In other news, the German finance minister hinted at possible retaliatory actions against the US if trade talks don’t go well. Japan’s trade negotiator expressed frustration over a 25% tariff on auto imports, a topic discussed with the US commerce secretary. France’s trade deficit stood at €7.76 billion, while Germany recorded a positive trade balance of €18.4 billion in May. Markets noted rising long-term yields, especially in Germany, suggesting less worry about central banks not meeting their targets. Meanwhile, the US dollar remained strong following last week’s positive employment data, although a clear trend is still awaited. Stocks recovered losses from trade tensions, showing that the market is becoming less sensitive to ongoing trade disputes. The American trading session is likely to focus on more trade negotiations as a deadline approaches. The RBA’s choice to keep rates unchanged indicates that inflation data still significantly influences Australia’s monetary policy. Although some market players expected a rate cut, the decision to pause suggests caution about making changes too quickly. This means investors may need to rethink heavy bets on lower yields. There’s a higher chance that exposure to longer-term durations could face pressure in the coming weeks, especially if upcoming inflation data is unexpectedly high. Germany’s mention of possible tariff retaliation and Japan’s complaints about imported car tariffs confirm our concerns — trade in developed economies may soon become more complicated. Germany’s finance minister appears to be floating these options not for immediate use, but as a deterrent or negotiating tactic. Linear assumptions about export-sensitive sectors may need to be adjusted. While automated escalations have been hinted at before, the frequency of these comments suggests mounting risks. Germany’s trade surplus and France’s deficit highlight issues with manufacturing and energy dependencies. These figures become more significant when viewed alongside yield trends. The recent rise in German bund yields, despite changing expectations from the European Central Bank (ECB), suggests that inflation worries remain and there’s confidence in stable growth. This sends a clear message: if long-term rates in Europe are rising without changes in short-term rates, it might be due to reassessing fiscal risks or growth expectations. We’re adjusting our forward rate expectations accordingly. In the US, the strength of the dollar after strong employment figures hasn’t dropped sharply but hasn’t increased significantly either. This suggests that the rise in yields might already be factored into current levels. We’ve noticed that trade volumes have expanded, especially in out-of-the-money options, likely in anticipation of clearer views forming once the Consumer Price Index (CPI) is released. If you hold dollar upside trades based only on recent wage and job reports, be cautious of time decay unless another strong data point comes in soon. While stocks have shrugged off new headlines about retaliatory tariffs, interpreting this as indifference would be a mistake. The deeper insight is that markets currently have faith in earnings resilience and liquidity, not that they overlook risks. However, the decline in equity volatility has made hedging more expensive, prompting us to shift our protection to longer-dated contracts expiring in August rather than near-term ones. As Washington prepares for another round of discussions before deadlines begin to matter, implied volatility in FX and rates markets indicates that more decisive movements may be on the horizon. Spreads between short- and intermediate-term options suggest positioning for uneven outcomes. We are focusing on strategies that perform well during periods of increased volatility, particularly where the skew is inexpensive relative to actual market fluctuations.

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