The trade agreement between the US and Indonesia includes a 19% tariff on Indonesian imports. In contrast, US goods entering Indonesia will face no tariffs.
Indonesia will allow US companies greater market access. Additionally, Indonesia has committed to buying US energy, agricultural products, and jets.
Strategy And Framework
Trump aims to use this deal as a standard model. The strategy is for importers to manage the tariff costs, potentially adapting them slowly to avoid inflationary pressures.
Based on the framework his administration aims to establish, the playbook for us is becoming clear, and it centers on calculated volatility. We must move beyond simple stock picking and into the derivatives that will price in these seismic policy shifts. The first and most immediate response should be in the foreign exchange markets. A deal structured this way is fundamentally bullish for the U.S. dollar and bearish for the Indonesian Rupiah. With the U.S. already running a trade deficit with them of over $15.8 billion in 2023, primarily in apparel, footwear, and rubber, this forced rebalancing will put immense pressure on the IDR. We should be looking at long-dated USD/IDR call options to capitalize on the inevitable depreciation of the Rupiah as it struggles to pay for American goods with a currency devalued by tariffs.
This policy blueprint also creates a classic pairs trade opportunity in the equity options market. On one side, we have the clear winners: US exporters. We need to be buying call options on companies poised to fill those purchase orders for energy, agriculture, and jets. Think key players in the S&P 500’s industrial and energy sectors. Historically, when Boeing secures major international orders, its stock sees a significant, immediate upside. In 2023 alone, U.S. aerospace exports totaled $148 billion. A dedicated state-level purchase agreement acts as a powerful catalyst. On the other side are the US companies that have become dependent on Indonesian manufacturing. We should be buying puts on select retail and apparel companies that will struggle to absorb a 19% cost increase without alienating consumers.
Rippling Economic Effects
Finally, we must position for the ripple effects on inflation and interest rates. The stated plan is to manage this, but the market will price in the risk regardless. We only need to look back at the 2018-2019 trade disputes, where the VIX, the market’s fear gauge, repeatedly spiked above 25 on tariff announcements. A similar volatility surge is a near certainty. We can structure trades using VIX calls or options on the ProShares Ultra VIX Short-Term Futures ETF (UVXY) to profit from these expected flare-ups. More critically, any sign that these costs are trickling into the Consumer Price Index will force the Federal Reserve’s hand. The market is currently pricing in rate cuts, but this policy introduces a significant inflationary threat. We should be using options on 2-year and 10-year Treasury note futures to position for a “higher for longer” interest rate environment, hedging against the market’s optimistic view on disinflation.
