US President Donald Trump emphasised the need for a fair trade deal with China, citing concerns about sustainability with a proposed 100% tariff. He expressed optimism about discussions with Chinese President Xi Jinping, although outcomes remain uncertain.

Following Trump’s statements, the US Dollar Index (DXY) remained stable around 98.50. US stock index futures showed mixed results, with Dow Futures increasing by 0.15% and Nasdaq Futures decreasing by 0.2%.

The US China Trade Conflict

The US-China trade conflict began in 2018, centred around accusations of unfair trade practices and intellectual property issues, leading to reciprocated tariffs. The conflict persisted until the US-China Phase One trade deal in January 2020, which aimed to improve economic relations. Despite the pandemic shifting focus, tariffs mostly remained under President Joe Biden’s administration.

Donald Trump’s return to the presidency in 2025 heralded a resurgence of trade tensions, with a proposed 60% tariff on China. These measures are likely to affect global supply chains and economic stability, influencing the Consumer Price Index inflation rate due to reduced investment and spending.

The President’s softer tone on China tariffs is reducing immediate market fear, which means we should expect implied volatility to fall in the near term. This shift suggests that the extreme downside hedges traders put on earlier this month might be unwound. We should now position for a period of uncertainty rather than certain conflict.

Looking at index derivatives, the CBOE Volatility Index (VIX) has likely pulled back from its recent highs, similar to patterns we observed back in 2019 whenever trade talks showed signs of progress. This may present opportunities to sell near-term options premium, but the upcoming meeting between the two leaders is a major risk event. Therefore, buying volatility with expirations after the meeting could serve as a prudent hedge against a negative surprise.

Trends In Currency And Commodity Markets

In currency markets, we are seeing a predictable move out of safe havens like the Japanese Yen and into the US Dollar. The Australian dollar, a key proxy for Chinese trade, has stabilized, and we’ve likely seen a sharp drop in demand for put options on the currency. Traders will be closely watching the offshore Yuan (CNH), which has likely strengthened from the lows we saw last month when fears of a 100% tariff peaked.

Commodity markets have reacted swiftly, with gold dropping 2% as traders liquidate their safety positions. More importantly, we’ve seen agricultural futures like soybeans rally, reversing some of the deep losses experienced after the 60% tariffs were imposed in early 2025. This sensitivity highlights potential upside for call options on commodities that are central to US-China trade if a deal appears more likely.

The overall strategy for the coming weeks should be to reduce highly directional bets and focus on volatility plays around the upcoming meeting. Selling options with expirations before the planned summit could take advantage of the current calm. However, as we learned between 2018 and 2020, sentiment can turn on a dime, so holding some form of portfolio protection is essential.

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