Insights 
VT 
The US dollar’s earlier gains have diminished, with a stabilisation in the risk mood following the US equity open. Dollar sellers became active shortly after, as Treasury yields decreased across the curve, influenced by European sovereign bonds.
For the USD/JPY currency pair, the fall just below 148.00 aligns with the 50% retracement from the Asian session’s rally. The pair has now rebounded to 148.12, with further support anticipated at 147.77, marking the 61.8% retracement level.
Us Economic Data Impact
Today’s US economic data showed stagnation in manufacturing, impacting the dollar unfavourably. Additionally, last Friday’s successful court challenge against tariffs introduces uncertainty in investment decisions.
While there is not a significant pull towards ‘risk off’ trades, partly due to poor September season trends, the removal of Trump’s tariffs could boost global growth and trade clarity. Although it may negatively affect sovereigns, the tariffs were not generating substantial revenue, especially given the US’s large fiscal deficit.
The US dollar is giving back its gains, and we see the USD/JPY pair struggling to stay above the 148.00 level. We should consider buying JPY call options or USD put options, as falling US Treasury yields reduce the dollar’s appeal. The next key level of support to watch in the coming weeks is 147.77.
The recent economic data is not helping the dollar, with the August ISM manufacturing report we saw today coming in at 48.5, indicating contraction. At the same time, the prices paid component remains high, fueling stagflation fears and making it harder for the Federal Reserve to stay aggressive. This environment supports buying puts on dollar index funds, anticipating further weakness.
Global Trade And Tariffs Impact
Despite this, we don’t see a major rush to a full ‘risk-off’ trade, even with the market’s poor historical performance in September. The recent court ruling against the Trump-era Section 301 tariffs on over $300 billion of Chinese goods is a significant boost for global trade certainty. This suggests selling VIX call options with strikes above 20 could be a viable strategy, as it bets against a major spike in market fear.
The combination of slowing US growth and improving global trade prospects creates a unique situation. This could lead to a scenario where the dollar weakens while stock markets, particularly in sectors like industrials and technology, perform well. We could structure trades using call options on relevant sector ETFs to capture this potential upside.
