Donald Trump highlighted that a strong dollar can hurt sales, while countries like China and Japan favor weaker currencies. He mentioned that discussions with Japan have opened doors for the US and expressed hope for similar progress with the EU. Regarding trade with the UK, he plans to talk about adjustments, but there’s limited room to change steel and aluminum tariffs. Trump stated that about 200 tariff letters would be sent out, with most suggesting a 10% tariff and some going as high as 15%. He believes the EU has a good chance of reaching a trade deal, which might include lowering tariffs. He also suggested using the revenue from these tariffs to provide rebates to Americans. Legal issues surrounding the Maxwell/Epstein case are ongoing. Deputy Attorney General Todd Blanche met with Ghislaine Maxwell and her lawyer in Tallahassee. Maxwell, who was sentenced to 20 years for sex trafficking minors to Jeffrey Epstein, continues to be a focus of attention. There is speculation about what information she may reveal. The specifics of their discussions are confidential, raising questions about how her testimony could affect Trump.

US Dollar Strategy

Based on the former president’s comments, it seems the US dollar is being targeted for weakness to increase exports. The Dollar Index (DXY) has stayed high, recently trading above 105, and this talk could push it lower. Derivative traders might want to consider strategies that gain from a falling dollar, like buying call options on currency pairs such as the Euro vs. Dollar (EUR/USD). The plan to send out nearly 200 tariff letters indicates a return to trade tensions, especially with important partners. In 2023, the US had a trade deficit of over $200 billion in goods with the European Union, making it a clear target for these policies. We would recommend purchasing put options on ETFs that represent sectors reliant on imports, like retail (XRT) or transportation (IYT), since these would be affected by rising costs. This mix of currency discussions and trade threats could lead to market volatility. During the last broad tariff announcements in 2018, the CBOE Volatility Index (VIX) spiked over 80% afterwards. We believe the market is underestimating the risk of sudden policy changes in the near future.

Market Volatility Strategy

With the VIX currently low, often below 15, there is a good chance to buy protection at a low cost. This could mean purchasing call options on the VIX or straddles on major market indexes like the SPY. This strategy can profit from significant market movements in either direction, which is likely given the uncertainty ahead. Mr. Michalowski’s reports on political matters, such as the situation with the deputy attorney general and Maxwell, add noise and the potential for unexpected events. This backdrop of non-economic factors supports our view that holding long volatility positions is a smart hedge. The focus on specific deals with the UK and EU suggests that options on multinational corporations with substantial European involvement will see more activity. Create your live VT Markets account and start trading now.

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