Chinese and US economic officials have agreed on a framework for a potential trade deal, set for discussion between Presidents Donald Trump and Xi Jinping. This deal, reportedly agreed upon during the ASEAN Summit, delays Trump’s proposed 100% tariffs on Chinese imports and extends the reconsideration period for China’s rare earth minerals licensing regime by a year.

The Australian dollar rose by 0.37%, trading at 0.6537 in response to this news. A trade war typically signifies an economic conflict arising from extreme protectionism, involving tariffs and counter-barriers that escalate import costs and living expenses.

Background of the US-China Trade War

The US-China trade war began in 2018, when the US imposed trade barriers citing unfair practices, leading to China’s retaliatory tariffs. A Phase One deal was signed in January 2020, requiring China to enact certain economic reforms. However, the COVID-19 pandemic shifted focus from this conflict, though subsequent President Joe Biden retained many tariffs.

With Trump’s return and 60% tariffs imposed in 2025, tensions between the US and China have reignited. This renewed conflict is impacting global supply chains and contributing to inflation, particularly affecting consumer prices.

With the threat of the November 1st tariffs apparently off the table, we should expect a significant drop in market volatility. This is reminiscent of the periods in 2019 when positive trade headlines caused the CBOE Volatility Index (VIX) to fall sharply, sometimes by over 10% in a single day. Selling VIX futures or buying puts on volatility-tracking ETFs could be a direct way to position for this expected calm.

Impact on Currencies and Equity Markets

The Australian dollar’s rally is likely just the beginning for currencies sensitive to global trade sentiment. We saw the offshore yuan (CNH) strengthen considerably against the dollar during the 2020 Phase One deal signing, and a similar move from its current level around 7.95 per dollar should be anticipated. Traders may look at buying AUD/USD call options to ride the momentum or selling USD/CNH calls to bet against the dollar’s recent strength.

Equity markets have been pricing in worst-case scenarios since the 60% tariffs were imposed in January, so this news should fuel a relief rally. US index futures, particularly for the tech-heavy Nasdaq 100, are poised to benefit as companies like Apple and NVIDIA see reduced supply chain risks. Buying out-of-the-money call options on indices like the S&P 500 offers a leveraged way to play a potential sharp upward move in the coming weeks.

Beyond broad indices, specific sectors that were hit hard by the trade war are now attractive. We can look back to the 2018-2020 period when shares of companies like Caterpillar and Boeing were highly sensitive to trade news, as were agricultural commodities like soybeans. Call options on industrial ETFs or soybean futures could see significant interest, as China is the world’s largest importer of these goods.

While the initial news is positive, the deal is still just a framework until Presidents Trump and Xi meet later this week. We remember all too well how quickly sentiment reversed on a single tweet between 2018 and 2020, turning rallies into sharp sell-offs. Therefore, using defined-risk option strategies, like bull call spreads instead of buying calls outright, could be a prudent approach to manage potential reversals.

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