Insights 
VT 
On April 8, 2025, the USD/CNH exchange rate hit a peak of 7.4273 due to the trade war between the US and China. Despite both countries agreeing to a series of trade truces, which saw tariffs decrease, the exchange rate stabilised in a range between 7.10 and 7.20.
The imposition of US tariffs as high as 145% and China’s tariffs of 125% initiated a 90-day truce, reducing tariffs to 50% for Chinese exports and 30% for US exports. This truce was extended for another 90 days after August 12. During this period, the yuan maintained its value despite increased tariffs on Chinese goods.
Currency Exchange Dynamics
Although the Bloomberg dollar spot index fell by nearly 8% this year, the USD/CNH rate decreased only by around 2.5%. This indicates that the US dollar has maintained its strength against the offshore yuan compared to its performance against other major currencies. The data illustrates the dynamics of currency exchange amid trade negotiations and economic policies.
The current stability in the USD/CNH, trading around 7.15, is deceptive. While the yuan appears resilient since the trade truce began, the US dollar has actually held its value far better against the yuan than against other major world currencies. This year, we have watched the broader Bloomberg dollar index fall nearly 8%, yet the USD/CNH has only declined by about 2.5% from its April peak.
We are now approaching a critical deadline in just a few weeks, as the second 90-day trade truce is set to expire around November 10. The market has been lulled into a sense of calm by the prolonged pause in hostilities, creating a period of low volatility. This quiet period is unlikely to last as negotiators from both sides decide whether to extend the truce, escalate tariffs, or forge a new deal.
Looking back at the data from this year, we see that despite the 50% tariffs, China’s economy has shown surprising strength. For example, China’s recent Q3 GDP growth was reported at 4.9%, beating expectations, and industrial production for September also showed a modest uptick. This resilience might give Chinese negotiators the confidence to hold a firm line in the upcoming talks.
Market Strategies Amid Trade Negotiations
On the other hand, recent inflation figures in the US, with the September 2025 Consumer Price Index remaining stubbornly above the Federal Reserve’s target, limit the central bank’s ability to ease monetary policy. This provides a backdrop of fundamental support for the dollar. This economic footing gives US officials significant leverage heading into the truce deadline.
For derivative traders, this environment points towards positioning for a potential spike in volatility. Buying USD/CNH call options with expirations after the mid-November deadline offers a limited-risk way to profit from a breakdown in talks. A return to the massive tariff levels we saw in April could easily send the exchange rate back toward the 7.40 level.
We believe that current implied volatility in the options market is too low given the binary risk event on the horizon. Looking back to similar periods during the 2019 trade disputes, we saw 1-month USD/CNH implied volatility surge past 8%; today it sits closer to 5%. This suggests that long volatility strategies, such as straddles or strangles, could be attractively priced.
Alternatively, a surprise long-term agreement would likely cause the yuan to strengthen sharply, pushing USD/CNH below its recent 7.10 floor. Traders who anticipate a breakthrough could consider buying put options. This would serve as either a primary bet on a peaceful resolution or a hedge against long USD positions elsewhere in a portfolio.
