The United States and China have extended their tariff truce by 90 days, preventing the implementation of increased duties on each other’s goods. President Trump signed an executive order delaying higher tariffs until November 10, while China’s Commerce Ministry also postponed the planned addition of US firms to restriction lists.
Asian markets responded positively to the truce extension, and Japan’s Nikkei and Topix reached record highs. Australia’s business confidence rose to a three-year high (+7), driven by services and construction. Retail prices, however, increased by 1.1%.
China’s New Loan Policies
China will announce new subsidised loan policies on August 13 to stimulate household consumption and bolster the service sector. Meanwhile, in the US, a new head for the Bureau of Labor Statistics has been nominated.
The Asian FX market remained steady ahead of anticipated US inflation data, with only a slight dip in the USD after Monday’s gains. Asian stock performances included Australia (S&P/ASX 200) +0.14%, Hong Kong (Hang Seng) +0.12%, Japan (Nikkei 225) +2.45%, and Shanghai Composite +0.48%. The Reserve Bank of Australia is expected to reduce its cash rate by 25 basis points later today.
The 90-day tariff truce between the US and China removes a key source of uncertainty until November. We should expect implied volatility to decrease in the coming weeks. Selling options premium on indices like the S&P 500 could be a viable strategy, as the CBOE VIX Index already dropped from 18 to 14 on this news.
All eyes are now on the US inflation data due out later today. With economists forecasting a slight dip in the annual rate to 3.0% from last month’s 3.1%, any surprise will dictate the Federal Reserve’s next move. We are positioned for a significant market reaction, as this will be the most important data point before the Jackson Hole symposium later this month.
China’s Stimulus Effects on Commodities
China’s upcoming announcement on subsidized loans tomorrow should be a tailwind for risk assets. This stimulus is particularly good for commodity demand, which supports the Australian dollar. We’ve already seen iron ore prices climb over 8% in the past month to over $115 per tonne, and this policy should add to that momentum.
The Reserve Bank of Australia is expected to cut its cash rate today, which normally weakens a currency. However, this 25-basis-point cut has been widely priced in by the market for weeks. The positive news from China, Australia’s largest trading partner, is likely a more powerful driver for the AUD in the near term.
This environment of diverging central bank policies, like we saw drive markets back in 2023, creates clear opportunities in currency pairs. A long position in AUD/JPY looks attractive, betting on Australian commodity strength against a Japanese economy with stagnant growth. This leverages both the China stimulus news and expected central bank actions.
