The euro experienced a slight increase in early Asian trade due to a new framework trade deal between the EU and the US. The EUR/USD hit a high near 1.1770 before settling to around 1.1750/55.
The trade deal includes several components: a 15% tariff ceiling for EU goods in the US, a $750 billion commitment by the EU to buy US energy, a $600 billion EU investment in the US, and no stacking tariffs. EU reactions varied, with Finland criticising the deal, while Germany’s trade lobby called it a “painful compromise.”
Currency Markets Overview
In currency markets, AUD, GBP, and NZD saw modest gains, while USD/JPY and USD/CHF traded within narrow ranges, keeping FX volatility low. Equities and cryptocurrency markets rose slightly, buoyed by a firmer risk sentiment.
U.S.–China trade talks are resuming in Stockholm, without an expected breakthrough, but an extension of the tariff truce is likely. Japan’s $550 billion US investment plan is mostly based on loans and guarantees, with only a small equity portion.
In Asia-Pacific stocks, Australia’s S&P/ASX 200 increased by 0.24%, Hong Kong’s Hang Seng rose by 0.48%, Japan’s Nikkei 225 fell by 0.88%, and the Shanghai Composite saw a slight rise of 0.03%.
Given the small euro reaction to the framework deal, we see the currency settling into a range. The deal removes some downside risk, but mixed EU reactions and final details being unconfirmed will likely cap any significant rally. With the Cboe EuroCurrency Volatility Index (EVZ) recently trading near multi-year lows, we believe selling options premium through strategies like iron condors on EUR/USD will be profitable.
Market Volatility and Strategy
The broader market’s low volatility environment appears set to continue, especially with the anticipated 90-day extension of the U.S.–China tariff truce. This stability reduces tail risk, making it attractive to short equity volatility. We would consider selling VIX futures or buying put options on volatility-tracking products as this calm persists.
For equities, the deal provides modest relief for European exporters, but the comment from the BGA highlights underlying economic stress. Recent data showing the German Ifo Business Climate Index falling for a fifth consecutive month supports this cautious outlook. We therefore favor buying short-dated call options on European indices for a tactical bounce rather than positioning for a major new uptrend.
The expected truce in Stockholm is significant, as total trade between the two nations was over $690 billion in 2022, making stability a key driver for market sentiment. This should provide continued support for risk-sensitive currencies like the Australian and New Zealand dollars. We believe long call options on the AUD/USD pair are a good way to position for this ongoing reduction in trade tension.
The clarification from Akazawa on Japan’s investment plan likely contributed to the Nikkei’s decline, as markets digested that the package is less impactful than the White House’s initial framing. Historically, markets often sell off when large investment figures are revealed to be mostly debt and guarantees instead of direct equity. This presents a relative value opportunity, going long U.S. energy sector ETFs while potentially shorting Japanese equity index futures.
