Insights 
VT 
China’s Commerce Ministry called on the US to amend its practices promptly, suggesting that proposals for talks are undermined by threats and new restrictions. Despite these tensions, both nations maintain communication through the China-US economic and trade consultation framework, holding working-level discussions.
The Australian Dollar was trading 0.02% higher against the US Dollar at 0.6516. A trade war is an economic dispute between countries involving trade barriers like tariffs, leading to increased import costs and a higher cost of living.
Us China Trade War Overview
The US-China trade war began in 2018 when US tariffs were imposed on China for alleged unfair practices. The tensions resulted in reciprocal tariffs on US goods by China. The US-China Phase One trade deal was signed in January 2020, requiring reforms from China, but the focus shifted due to the pandemic. President Biden maintained existing tariffs, adding new ones during his term.
Donald Trump’s return to the US presidency in 2025 initiated renewed tensions, with his campaign promise of a 60% tariff on China materialising. This resurgence in trade conflict disrupts global supply chains, reduces spending, especially on investment, and contributes to inflation as measured by the Consumer Price Index.
With these renewed US-China trade tensions, we see market fear increasing. The CBOE Volatility Index (VIX), a key gauge of fear, has surged past 28, a level not consistently seen since the uncertainty of early 2024. Traders should anticipate higher volatility across asset classes, making long-dated options more expensive.
The Chinese yuan is a direct focus, and we have seen the offshore yuan (CNH) weaken past 7.40 to the dollar as traders price in economic strain. We should consider strategies that benefit from a weaker yuan, while also watching the Australian dollar. The AUD/USD is likely to face downward pressure below the 0.6500 level, given Australia’s heavy reliance on Chinese commodity demand.
Impact on Markets
Equity markets are showing clear signs of stress, particularly in exposed sectors like technology and industrials. Looking back, we remember how semiconductors were at the heart of the 2018-2020 dispute, and this time is no different. The Philadelphia Semiconductor Index (SOX) has already fallen over 9% this quarter, signaling that traders are positioning for supply chain disruptions by buying put options on tech ETFs.
We must pay close attention to the commodity markets, as this is where China is retaliating. Following the playbook from 2023’s restrictions on gallium, China’s new export curbs on dysprosium oxide have already caused its price to jump over 15% last month. This creates opportunities in commodity futures but also signals risk for manufacturers dependent on these materials.
Given the tit-for-tat nature of these announcements, defensive positions are becoming crucial. We are seeing increased demand for put options on broad market indices like the S&P 500 to hedge portfolios against a potential downturn. The current environment suggests that any rallies may be short-lived until there is a clear de-escalation from either Washington or Beijing.
