Insights 
VT 
US President Donald Trump announced plans to eventually lower tariffs on Chinese imports, citing the need for mutual business dealings. No immediate trade deals are expected this week, and there are no plans for talks with China’s Xi Jinping.
The uncertainty surrounding tariffs has impacted the currency market, with the US Dollar Index decreasing by 0.31% to 99.73. This change reflects the ongoing economic tension between the United States and China.
Understanding The Trade War
A trade war refers to economic conflict due to protective trade barriers like tariffs, leading to increased import costs. The US-China trade conflict, initiated in 2018 by Trump, involved tariffs due to disagreements over trade practices and intellectual property. China’s retaliatory tariffs escalated the situation, though the Phase One deal in 2020 aimed to ease tensions.
Donald Trump’s return to the presidency has rekindled trade conflict, threatening to impose 60% tariffs on China. This action from January 2025 sparks renewed economic tensions, impacting global supply chains and contributing to Consumer Price Index inflation. The resumption of policies post-Trump could affect global economic stability and trade dynamics.
Given Trump’s announcement about potential tariff reductions—though with no talks planned nor deals imminent—it’s a signal, not a shift. We’re looking at a rhetorical easing rather than a change in policy. Still, even this hint influences how markets react, particularly in currency and derivatives.
Last week’s Dollar Index slip to 99.73, a 0.31% decline, is less about numbers than about sentiment. The drop captures weakened confidence in trade relations with China following renewed threats of heavy tariffs. That’s the game we’re watching now: not what’s happening immediately, but what’s looming on the near horizon. Currency and interest rate volatility are typically some of the earliest pressure points in these scenarios, and we should expect that to continue in short bursts.
Implications For Derivative Traders
For derivative traders, this backdrop adds a layer of directional uncertainty. It’s clear now that the election implications are not merely speculative—they are being priced into long-term expectations. The rate market is particularly exposed to movements stemming from trade-related inflation. With a proposed 60% tariff in January next year, downstream effects on transport and manufacturing costs should be modelled more precisely. Inflation-linked instruments might see increased hedging activity, and we’re already observing wider spreads in long-duration protection.
Then there is the matter of future monetary policy response, which doesn’t act in a vacuum. Trade frictions affect consumer prices directly, which, in turn, influence central banks’ stances. In our view, the market is watching for strong signals from the Federal Reserve, particularly if tariff policies move from threat to implementation. Traders active in macro-driven strategies should prepare scenarios where trade restrictions push core CPI higher, compelling a hawkish shift from monetary authorities even if growth slows.
Lighthizer, a key architect in earlier trade frameworks, has not re-entered the discussion publicly, but the foundational approach he supported remains intact. Supply chains are familiar with the constriction from 2018 to 2020, and the Phase One agreement only partly unwound those strains. If the rhetoric translates into real-world restrictions, option premiums on multi-national manufacturing equities may begin to reflect expectations for lowered margins and shipment delays.
What we’re doing now is paying close attention to commodities as well. These goods are first affected by any bilateral import restrictions, especially agricultural and tech-related inputs. Derivatives linked to energy and industrial metals could begin to display asymmetric pricing as the speculation around Chinese retaliation develops. Risk skew is growing wider in some agricultural futures, though volume has yet to confirm broader sentiment shifts. That’s where historical cyclicality helps—past trade disputes offer a framework for timing exposure.
Early signals from corporate earnings calls reveal broader concerns about materials sourcing and ability to pass increased input costs to consumers. While that’s not new, we’re seeing a broader reassessment of forward guidance when references to tariffs resurface. Traders positioning around earnings volatility should consider that delayed impacts from trade may not be linear—and could arrive later than expected, particularly if consumer spending remains firm.
In times like this, we draw on market memory. The period between late 2018 and early 2020 established a template. Index options, especially those pegged to exporter-heavy benchmarks, displayed wider beta relative to trade developments. The same may reoccur if tariffs return in full next year. Calendar spreads and structured derivatives may be efficient tools to navigate this—delaying commitment while maintaining optional upside until further policy decisions clarify.
We should also flag that broader risk appetite wanes when trade actions inject pricing noise into inflation metrics. Bond implied volatility often leads that shift, and it is not coincidental that Treasury yields briefly wobbled following Trump’s tariff remark. Traders who operate in correlation-based models may need to actively account for breakpoints between commodity inflation and rate expectations, as assumptions of stable co-movement may not hold in renewed trade tension periods.
So while the lack of ongoing talks between the US and China appears to dampen near-term deal hopes, the forward-looking view from derivatives markets suggests otherwise. No sharp reactions should not be mistaken for complacency—pricing mechanisms are merely adjusting for longer arcs. And that’s where thoughtful positioning comes into play.
