There appears to be a 50-50 chance of reaching a deal with the EU. President Trump noted a perception that Powell might be ready to lower interest rates.
He expects most deals to be finalised by 1 August and mentioned existing frameworks for a deal with China. Regarding Canada, the approach might shift to implementing tariffs rather than pursuing negotiations.
Potential Communication Strategies
Some agreements could be concluded through written communication rather than formal meetings. The Federal Reserve expressed appreciation for the President’s visit, which was followed by a reduction in his criticisms.
Regarding the US dollar, President Trump clarified he would never advocate for a weaker currency. Additionally, he mentioned that steps might be taken to pursue members of Hamas.
Based on these comments, we anticipate a sharp rise in market volatility. The combination of a 50-50 chance on a major trade deal and a firm August deadline creates significant uncertainty, which we believe will push the VIX index, currently hovering around 13, back towards the high teens. We should position for this by buying options rather than selling them.
The remarks concerning Powell signal a clear path toward monetary easing, a view supported by market pricing. The CME FedWatch Tool now shows a greater than 70% probability of a rate cut at the next meeting, a dramatic shift from just a few months ago. We see this as a green light to use interest rate futures to bet on lower rates through the end of the year.
Currency And Equities Strategy
This dovish policy stance should place downward pressure on the US dollar, regardless of the president’s statements. As the Federal Reserve lowers rates, the yield advantage of holding dollars shrinks, making other currencies more attractive. We will look at buying call options on currency pairs like the Euro to Dollar (EUR/USD), anticipating a move away from the dollar’s recent strength.
For equities, the environment is mixed but leans positive due to potential rate cuts. However, the risk of tariffs on Canada and a potential breakdown with the European Union suggests a targeted approach. We favor using derivatives to gain exposure to the tech-heavy Nasdaq 100, which is more insulated from trade wars, over the industrials in the Dow Jones.
The August 1st timeline mentioned by the president creates a specific event horizon for traders. Implied volatility on options expiring in late July and early August will be exceptionally high. We plan to use calendar spreads to capitalize on this, buying longer-dated options while selling the expensive shorter-dated ones.
There is a clear divergence in tone between negotiations with China and those with our North American and European allies. This suggests a relative value trade, favoring assets tied to a potential China resolution. Looking at historical data from the 2018-2019 trade war, we saw Chinese equities rebound sharply on any hint of a deal, a pattern we expect to repeat.
