The US Secretary of Commerce, Howard Lutnick, discussed a trade agreement between the US and Japan. Japan will finance projects, while the US will choose which projects to finance. The deal includes equity, loans, and loan guarantees, with Japan acting as a financier. There is a 15% tariff on car production in Japan.<\/p>\n
Lutnick suggested this Japan deal could serve as a template for a potential EU trade agreement. For this to happen, the EU needs to accept US products and standards, which could encourage the US administration to move forward. The desired outcome is a complete opening of the EU market.<\/p>\n
Expectations for tariffs between the US and the EU fall between 10% and 20%. The aim is to reach an agreement within this range to minimise uncertainty around tariffs, with lower rates being preferable. This approach may lead to a more stable market environment, alleviating concerns surrounding trade terms.<\/p>\n
Based on these comments, we see a clear baseline for expectations forming around a potential EU auto tariff. The 10-20% range is now the consensus view, meaning any deal struck within this band will likely reduce market uncertainty. Traders should prepare for a drop in implied volatility, particularly in the most exposed sectors.<\/p>\n
We believe the most direct way to position for this is by looking at options on European automakers. The EU exported over $60 billion in motor vehicles and parts to the U.S. in 2023, making companies like Volkswagen and BMW exceptionally sensitive to this outcome. Selling volatility through strategies like iron condors could be profitable if a deal is announced within that expected range, as uncertainty premium evaporates.<\/p>\n
Historically, major trade negotiations create volatility spikes that collapse once an agreement is reached, as seen with the VIX during the US-China trade talks in 2018 and 2019. We anticipate a similar pattern here, creating an opportunity for those positioned to benefit from declining volatility. The key is that the market dislikes uncertainty more than it dislikes a tariff it can price in.<\/p>\n
However, we must also hedge against a surprise outcome. Buying cheap, out-of-the-money puts would offer protection if negotiations collapse and tariffs exceed 20%. Conversely, a surprisingly low tariff below 10% would cause a sharp rally, making long call positions on European auto ETFs profitable.<\/p>\n
The currency market offers another avenue for expressing this view. A favorable deal for Europe, landing at the low end of the tariff range, would likely strengthen the EUR\/USD exchange rate. We can use forex options to position for a relief rally in the Euro.<\/p>\n
The reference made by the commerce secretary to the Japanese financing model suggests a complex, drawn-out negotiation. This implies that volatility may not collapse instantly but could gradually decline over several weeks. This timeline favors options strategies that profit from time decay.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" US and Japan strike a trade deal; US selects projects, Japan funds them; EU agreement may follow.<\/p>\n","protected":false},"author":62,"featured_media":17039,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-27045","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/27045","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=27045"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/27045\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/17039"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=27045"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=27045"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=27045"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}