MUFG expects US trade tariff uncertainty to return as Section 122 measures expire and give way to more targeted action under Section 301, following investigations already announced against most key US trading partners. Implementation timing and product coverage remain unclear, but the bank anticipates tariffs that broadly replicate existing Section 122 measures, implying limited direct FX effects. Even so, a less predictable route to enforcement and greater scope for differentiation could lift FX volatility.
The bank frames the potential market response against a backdrop in which the US rates curve is priced for hikes while Middle East risks are elevated, conditions that could skew reactions in a more US dollar-supportive direction. Within emerging markets, MUFG sees USD/Asia as the likeliest area for upside, where yield may offer less offset than in USD/LatAm. G10 FX is expected to be less affected, although extended and intensifying uncertainty could eventually revive US dollar selling as concerns build over policy unpredictability and economic damage.
Options Strategies In Anticipation Of Tariff Uncertainty
As the transition from Section 122 tariffs to targeted Section 301 actions begins this month, we advise derivative traders to position for a significant shift in foreign exchange volatility. The unpredictability of these new trade investigations is likely to disrupt quiet FX markets, especially with global geopolitical tensions already elevated. We recommend utilizing options strategies to capture the impending swings rather than relying solely on spot trading.
We see the greatest upside potential in USD/Asia pairs, where yield differentials will do little to offset the drag of new tariffs on Asian exporters. Historically, during the 2018 Section 301 tariff rollouts, the US Dollar surged as the Chinese Yuan depreciated by over 10% in just a few months. Derivative traders should consider buying short-term USD call options against Asian currencies, particularly the Renminbi and the Korean Won, to leverage this expected upward pressure.
Differentiation Across FX Markets And Hedging For Reversal
Unlike Latin American currencies, which may find some protection in higher local interest rates, Asian currencies remain highly exposed to these targeted trade measures. Meanwhile, we expect G10 currencies to remain relatively stable in the near term, meaning expensive long-USD positions against the Euro or Pound might not yield the same results. Focusing your volatility plays on Asian crosses offers a much cleaner risk-reward ratio for the coming weeks.
However, we must also prepare for a potential reversal if these tariff battles drag on and begin to harm the domestic US economy. Historical data shows that prolonged policy uncertainty eventually erodes the Greenback’s strength as investors grow concerned over unpredictable trade policies. To hedge against this, we suggest structuring longer-dated put options on the USD, ready to capture a downward turn if Washington’s trade policies begin to drag on US economic growth.
