China’s Vice President, Han Zheng, said on Friday that there is room for cooperation between the US and China. He hopes US businesses can help improve US-China relations. The US Dollar Index dropped by 0.22%, now at 100.58.

Understanding The Trade War

A trade war is an economic conflict where countries impose trade barriers, like tariffs, to raise import costs. The US-China trade war began in 2018 during President Donald Trump’s term. It involved tariffs on many products and increased economic tensions. The Phase One deal in 2020 aimed to ease these tensions, but the pandemic shifted priorities temporarily. President Joe Biden kept the tariffs and added new ones. With Donald Trump potentially returning to the presidency, tensions are rising again. He has suggested imposing 60% tariffs on China. This tension affects global supply chains and inflation, impacting consumer spending and investments. Vice President Han’s comments show a small shift towards cooperation. He is suggesting that economic sense may outweigh ongoing conflict. His encouragement for American companies to help shape relations signals a desire to restore investment confidence amid uncertain trade expectations. We’ve seen how shifts in policy affect financial markets. The US Dollar Index’s slight drop to 100.58 reflects changes in expectations about interest rates and overall market risk. Currency markets provide immediate insight into sentiment. A weaker dollar may indicate that markets are reconsidering growth forecasts or that risk appetite is growing, as trade disputes seem less damaging in the short term.

Pricing The Risk

When discussing trade wars, traders must keep a long-term view. Though the trade conflict started in 2018, the same tools of economic policy are still in play. Under Biden, there has been no significant shift away from tariffs, and new tech restrictions and tax measures keep the pressure on. The possibility of Trump returning to power threatens to increase tariffs again, changing risk pricing significantly. This is evident in volatility curves and hedging strategies. Looking ahead, traders should focus on inflation forecasts and changes in global logistics. If tariffs are taken seriously, the impact will be felt well beyond China. We’re already seeing movements in equity-linked options and some commodity-linked derivatives. Supply chains don’t adjust quickly, and markets often react to potential disruptions before they happen, suggesting traders with longer contracts should prepare for changes. Remember, any major policy proposal—like Trump’s suggested tariff hikes—creates secondary effects, such as increasing costs, potential retaliation, and lower corporate profits. These effects influence earnings predictions and inflation expectations, which then affect derivatives. Now, it’s crucial to monitor where capital flows. If traders increase hedging in Asia-focused ETFs or raise put options on consumer discretionary sectors, they may expect decreased consumer spending. This would cause higher implied volatility, especially for firms heavily involved in trade. Also, watch how the bond market responds to these concerns. If investors demand higher yields on medium-term Treasuries, it suggests worries about inflation and policy mistakes. Such macro signs often lead to adjustments in swaps and futures markets before any official actions occur. Overall, we need to pay close attention to market spreads and correlations instead of just reacting to headlines. When political statements impact the market, it’s about how these changes are interpreted by the instruments, not just the content of the statements. We’re not starting from scratch, but we are in a phase where familiar patterns may emerge in surprising ways. Create your live VT Markets account and start trading now.

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