Insights 
VT 
Renewed tensions between the US and China have led to a decline in stocks, with the USD firming in response. President Trump’s threat of tariffs over China’s rare-earth export policies has exacerbated these tensions. As a result, global stocks are weak, bonds are stronger, and gold has reached a record high of $4150. The uncertainty is bolstering the USD, while high beta currencies are underperforming.
Recent developments show stronger correlations between the S&P 500 and MXN at 76%, and a negative correlation between the CHF and US stocks at 37%. Current market actions reflect these trends, with AUD, NOK, and MXN showing losses, while JPY and CHF are performing well. The USD is near its recent peak, hinting at potential short-term gains despite long-term challenges such as Fed rate policy.
Us Government Shutdown Impact
The US government shutdown is also contributing to economic uncertainty, with federal worker layoffs beginning. If they become widespread, it could negatively impact the USD. With little major data released today, attention turns to speeches from various central bank officials, including Fed Chair Powell, alongside China’s imminent CPI and PPI reports.
We are seeing a familiar pattern emerge that echoes the trade tensions of the late 2010s. Renewed friction with China, this time centered on semiconductor supply chains, is dampening risk appetite and pushing investors toward safety. The CBOE Volatility Index (VIX) has reflected this uncertainty, climbing from 15 to over 19 in the past month.
Safe Haven Assets Performance
This “risk-off” environment is once again strengthening the U.S. dollar, much like it did during the tariff disputes we saw years ago. The Dollar Index (DXY) is currently trading near 106.50, a level sustained by both safe-haven flows and an interest rate differential that remains favorable for the U.S. This makes positioning for continued dollar strength against riskier currencies a logical move.
Safe-haven assets are performing well, with gold recently pushing past $2,450 an ounce. While some old analysis from the Trump era noted record highs, we know the peak then was closer to $1,550 in 2019, making today’s price significantly higher amid new geopolitical fears. We are also seeing capital flow into the Japanese Yen and the Swiss Franc, reinforcing their traditional roles during market stress.
Commodities and related currencies are showing signs of weakness, just as they did in the past. “Dr. Copper,” a key indicator of global economic health, has fallen 4% over the last thirty days on fears of slowing industrial demand. Consequently, we’ve seen high-beta currencies like the Australian dollar and Mexican peso underperform.
Given this environment, derivative strategies should focus on hedging against further equity declines and benefiting from rising volatility. Buying put options on major stock indices like the S&P 500 offers downside protection. At the same time, call options on gold and long positions in the U.S. dollar against commodity currencies seem prudent for the coming weeks.
