The US Treasury has labeled the Chinese Yuan as “substantially undervalued” and urges China to change its exchange rate. A recent report highlights China’s large external surpluses and a currency that does not reflect its true value, indicating that the RMB should rise based on economic fundamentals. In response to this news, the AUD/USD pair has increased by 0.09%. The US-China trade war is marked by economic disputes due to protectionist policies, which began in 2018 when the US imposed tariffs on China, accusing it of unfair practices. China retaliated with its own tariffs on US goods. Although the Phase One deal in 2020 aimed to bring some stability back, the pandemic changed priorities.

Trade Tensions Under Trump

Donald Trump’s return as President of the US has rekindled trade tensions. He promised to raise tariffs on China during his campaign, and his presidency is likely to escalate these economic conflicts. This may disrupt global supply chains, impact consumer spending, and raise inflation, reflected in the Consumer Price Index (CPI). We remember the US Treasury’s remarks from early 2025, which came after heavy tariffs were placed on Chinese goods again. The push for a stronger Yuan happened as this new trade war was starting to heat up, creating ongoing tension between US policy and market forces. The Yuan has faced pressure, with USD/CNH trading close to 7.45 even after Washington’s demands last year. This tension points to possible volatility ahead, as new policy announcements could lead to significant market shifts. We believe using long volatility strategies, like options straddles on the Yuan, could help profit from large movements in either direction. The trade conflict has directly influenced inflation, which is stubbornly around 4.5%, according to the latest CPI report. Therefore, we expect the Federal Reserve to maintain its aggressive stance, keeping interest rates higher for longer than what the market expects. Traders should consider strategies that benefit from sustained high rates, such as options on Secured Overnight Financing Rate (SOFR) futures.

Market Impacts and Strategies

Market uncertainty has kept the VIX index high, averaging over 20 for the past six months. We experienced similar spikes in volatility during the 2018-2019 trade dispute, creating profitable chances for quick traders. Buying call options on the VIX remains a useful hedge against sudden shifts in trade talks from Washington or Beijing. Currencies that are sensitive to global trade, such as the Australian dollar, have weakened significantly since last year. Currently, AUD/USD is struggling to maintain 0.6550. Since China is Australia’s largest trading partner, a slowdown in China will likely harm the currency. We suggest buying puts on the AUD/USD as a clear way to prepare for further decline. Looking back at 2018, China’s retaliatory tariffs severely impacted US agricultural exports, especially soybeans. We see this pattern repeating itself, as soybean futures have dropped over 15% since the tariffs were announced in January 2025. Positioning for further weakness through put options on soybean futures may be wise as these trade restrictions continue. Create your live VT Markets account and start trading now.

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