Recent US-China relations developments led to heightened demand for safe-haven assets while risk-sensitive assets faced pressure. President Trump announced a 100% tariff on China and export controls on critical software, reacting to China’s recent export restrictions on rare earth materials. As a result, the DXY stood at 99.25 levels.

Negotiation And Market Impact

China responded by urging the US to halt further tariff threats and advocate for more negotiations. The US indicated a willingness to negotiate a deal, with expectations of ongoing volatility leading to the APEC meeting. In this context, currencies sensitive to growth and sentiments, like the AUD, NZD, MYR, and RMB, may experience fluctuations, while safe-haven currencies such as gold, JPY, and CHF might remain in favor.

The DXY could see momentum despite a potential temporary pullback, supported at 98.40 and 98 levels with resistance at 99.80 and 100.20. Upcoming economic indicators include NFIB small business optimism, empire manufacturing, and industrial production reports. The US CPI release is pushed to 24 October. These developments should be monitored closely, given trade policy unpredictability and its impact on currency markets.

Following last Friday’s unexpected trade developments between the US and China, we are seeing a clear risk-off move. The Dollar Index is pulling back from its recent highs, currently sitting around 99.25, as traders move into safe-haven assets. The CBOE Volatility Index (VIX), a key measure of market fear, has jumped over 25% in the last two sessions and is now trading above 22, signaling significant anxiety.

This level of trade policy unpredictability suggests volatility will likely remain elevated in the coming weeks, especially ahead of the APEC meeting. We believe traders should consider strategies that profit from these price swings, such as buying options on currency pairs like the AUD/USD or on broad market indices. Looking back at the 2018-2019 period, similar trade disputes caused prolonged spikes in implied volatility which consistently rewarded those holding long option positions.

Safe Haven Currencies And Trading Strategies

The Japanese Yen and Swiss Franc are likely to remain well-supported, and we anticipate further strength against the dollar if tensions do not de-escalate. Gold has already responded by breaking decisively above the $2,400 per ounce level, a key psychological resistance point. Using call options on gold or yen futures could be an effective way to gain exposure to this flight-to-safety trend.

While the dollar’s longer-term trend may be intact, this sudden geopolitical risk could restrain further gains for now. We see the potential for a deeper pullback towards the 98.40 support level. Selling DXY futures or buying at-the-money puts on a dollar-tracking ETF could be a prudent way to position for this short-term weakness.

The upcoming economic data, such as this week’s Beige Book and industrial production figures, will be watched very closely for early signs of economic damage from the new tariffs. The delay of the crucial US CPI data until October 24th only adds to the uncertainty, leaving the market without a key inflation reading. This data vacuum could leave sentiment to drive trading for another week.

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