The US Treasury has declared the Chinese Yuan “substantially undervalued” and urged China to adjust its exchange rate. The semi-annual foreign-exchange report cites China’s sizeable external surpluses and undervalued currency, suggesting an urgent need for the RMB to appreciate according to economic fundamentals.
In market reactions, the AUD/USD pair has edged up by 0.09%. The US-China trade war involves economic conflicts triggered by protectionist measures. It started in 2018 when the US imposed tariffs on China for alleged unfair practices. China retaliated with tariffs on US goods. The 2020 Phase One deal aimed to restore stability, but the pandemic shifted priorities.
Trade Tensions Under Trump
Donald Trump’s return as the US President has reignited trade tensions. During his campaign, Trump vowed to impose higher tariffs on China. His presidency is expected to renew these economic conflicts, disrupting global supply chains, affecting spending, and contributing to inflation through the Consumer Price Index.
We are looking back at the US Treasury’s statement from early 2025, which followed the re-imposition of heavy tariffs on Chinese goods. The call for a stronger Yuan came just as the new trade war began to escalate. This created a fundamental conflict between US policy goals and market pressures that is still playing out today.
The Yuan has remained under pressure, with USD/CNH recently trading near 7.45, despite Washington’s demands last year. This tension suggests significant volatility ahead, as policy announcements could cause sharp reversals. We see value in long volatility strategies, using options straddles on the Yuan to profit from a large move in either direction.
This trade conflict directly fueled inflation, which, according to the latest CPI report, is stubbornly holding around 4.5%. As a result, we expect the Federal Reserve to maintain its hawkish stance, keeping rates higher for longer than the market anticipates. Traders should consider positions that benefit from sustained high interest rates, such as options on Secured Overnight Financing Rate (SOFR) futures.
Market Impacts and Strategies
Market uncertainty has kept the VIX elevated, averaging above 20 for the past six months. We saw similar spikes in volatility during the 2018-2019 trade dispute, which created profitable opportunities for nimble traders. Buying call options on the VIX remains a viable hedge against sudden escalations in trade rhetoric from either Washington or Beijing.
Currencies sensitive to global trade, like the Australian dollar, have weakened considerably since last year, with AUD/USD now struggling to hold 0.6550. China is Australia’s largest trading partner, and any further slowdown there will weigh heavily on the currency. We believe buying puts on the AUD/USD offers a clear way to position for further downside risk.
Looking back at 2018, China’s retaliatory tariffs hit US agricultural exports hard, particularly soybeans. We are seeing a repeat of this playbook, with soybean futures down over 15% since the tariffs were announced in January 2025. Positioning for further weakness through put options on soybean futures could be prudent as long as these trade barriers remain.
