The United States has finalised a trade agreement with Japan, prompting an optimistic market mood. Japan will invest $550 billion into the US and lower tariffs to 15%, while increasing US rice imports.
This development caused Japan’s Nikkei 225 Index to soar over 3.5%, hitting its highest level since July 2024. US stock futures were also up between 0.2% and 0.3%, reflecting positive market sentiment.
Us Dollar Performance
The US Dollar showed weakness this week, particularly against the Swiss Franc. Meanwhile, the US Dollar Index stabilised slightly below 97.50 early on Wednesday.
Prime Minister Mark Carney stated Canada’s trade focus will shift towards other allies. The USD/CAD trades below 1.3600 after a decline of over 0.5% on Tuesday.
The EUR/USD trades lower after three consecutive days of gains, while GBP/USD remains above 1.3500 following a rebound. Gold hit a new monthly high above $3,430 on Tuesday.
Understanding Tariffs
Tariffs are duties on imports to give local producers a market advantage. These are paid at the port of entry, unlike taxes which are paid at purchase.
President Trump plans to use tariffs to bolster the US economy, focusing on major trading partners like Mexico, China, and Canada.
We believe the trade agreement creates a clear “risk-on” environment for equity markets. The surge in the Nikkei 225 suggests derivative traders should consider buying call options on Japanese indices to ride the upward momentum. With the CBOE Volatility Index (VIX) currently sitting below 15, a level that historically signals low market fear, conditions appear favorable for continued stock market gains.
The massive $550 billion investment into the United States will likely create sustained, long-term demand for the US dollar from Japanese institutions. While the dollar is currently weak, we anticipate this flow will provide underlying support in the coming months. Historically, large-scale foreign direct investment, such as that seen in the late 1990s, has preceded periods of currency strength.
Given the statement from Carney, we see an opportunity in the Canadian dollar. With Statistics Canada recently reporting an unemployment rate of just 6.1%, the nation’s economic fundamentals appear solid, supporting a stronger currency independent of US policy. We would look to trade this by selling USD/CAD futures or buying put options on the pair.
The former president’s focus on tariffs creates ongoing uncertainty that benefits safe-haven assets. Gold reaching a new monthly high, recently trading above $2,340 an ounce, is a direct reflection of this geopolitical tension despite positive sentiment elsewhere. We advise maintaining positions in gold call options as a hedge against any sudden negative trade developments.
