Amazon and Apple reported strong Q3 earnings, surpassing analyst expectations and supporting Big Tech’s resilient profile. Following these reports, President Trump announced a 35% tariff on Canadian goods from August 1. Goods under the USMCA agreement and energy products like oil are not affected. This decision is controversial as the U.S. maintains a manufacturing trade surplus with Canada, raising questions about its strategic purpose.

A wider set of tariffs were also declared, including a 39% levy on Swiss goods, impacting the Swiss franc. The complete list of affected countries and products will be implemented in seven days. Japan’s Finance Minister Shunichi Kato criticised yen depreciation, attributing it to speculators, and threatened possible intervention. However, these warnings are increasingly ignored as USD/JPY remained steady above 150.70 despite previous surges.

Chinese Economic Performance

In China, the S&P Global Manufacturing PMI dropped to 49.5 in July, falling below the expected 50.3 and June’s 50.4, indicating a contraction in factory activity. This result slightly exceeded the official NBS figure of 49.3, highlighting continued weakness in Chinese industrial performance. Meanwhile, major currencies traded in tight ranges as markets awaited the U.S. nonfarm payrolls report.

The new tariffs are injecting a fresh dose of uncertainty into markets, which means we should anticipate a spike in volatility. We saw this playbook during the 2018-2019 trade wars, where the VIX index frequently surged on unexpected announcements. Option premiums will likely rise, creating opportunities to either buy protection or sell overpriced volatility depending on your risk appetite.

The 39% tariff on Switzerland is a direct hit on the franc, making bearish bets on the currency attractive. This levy targets high-value exports like watches and pharmaceuticals, which constitute over 45% of Swiss goods shipped to the U.S. annually. We should look at buying USD/CHF call options, as the Swiss National Bank may be hesitant to intervene aggressively after its recent rate cuts.

For Canada, the situation is more nuanced since the USMCA and energy exemptions soften the blow. Still, the headline tariff creates negative sentiment that could push USD/CAD higher, possibly toward the 1.3800 level last seen in early 2024. We should consider long positions in USD/CAD, but be mindful that the actual economic damage might be limited.

Opportunities in Currency Markets

In Japan, the market is openly challenging the Ministry of Finance, a stark contrast to the fear that drove markets after the interventions of late 2022. With verbal warnings failing, the path of least resistance for USD/JPY remains upward, making call options attractive on any dips. Traders will likely keep pushing the pair higher to test the Ministry’s breaking point.

The divergence between a strong U.S. tech sector and a weakening Chinese economy presents a clear pairs trading opportunity. Following blowout earnings from Apple and Amazon, we can express a bullish view on U.S. markets with call options on the Nasdaq 100. Simultaneously, China’s contracting manufacturing PMI, now at 49.5, justifies buying put options on China-focused ETFs like FXI.

All of these positions face a crucial test with the U.S. nonfarm payrolls report later today. A strong jobs number, beating the consensus forecast of 190,000, would reinforce the dollar’s strength and add fuel to these trends. A significant miss, however, could cause a sharp reversal as the market re-evaluates the health of the U.S. economy.

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