China’s Vice President, Han Zheng, stated on Friday the potential for collaboration between the US and China. He expressed a desire for US businesses to contribute to positive US-China relations.

The US Dollar Index saw a 0.22% decrease, standing at 100.58.

Understanding The Trade War

A trade war is an economic conflict involving trade barriers, such as tariffs, that increase import costs. The US-China trade war began in 2018 under President Donald Trump, involving tariffs on various goods and leading to further economic tensions. The Phase One deal in 2020 attempted to stabilize relations, but the pandemic shifted focus away temporarily. President Joe Biden maintained the tariffs and introduced additional levies.

With Donald Trump’s return as President, there are renewed tensions, promising to impose 60% tariffs on China. This resurgence is impacting global supply chains and inflation, influencing consumer spending and investment.

This piece underscores the delicate balance between geopolitical friction and macroeconomic reaction. Vice President Han’s remarks indicate a slight pivot, at least rhetorically, towards cooperation, hinting that economic pragmatism may take precedence over prolonged antagonism. His call for American firms to play a role in shaping relations isn’t just window dressing—it’s a subtle nudge towards restoring investment confidence amidst erratic trade expectations.

We’ve already seen how policy shifts feed through financial instruments. The US Dollar Index dipping to 100.58—down 0.22%—is a minor move, but it reflects expectations around interest rate paths, policy stability, and broader risk appetite. Currency markets are an immediate gauge of sentiment. A weaker dollar may suggest that the market is reconsidering growth projections or that risk-on sentiment is gathering momentum as trade tensions are seen as less destructive in the near term.

Pricing The Risk

The reference to trade wars spells out the longer timeline that traders must keep in the back of their minds. Although first ignited in 2018 through a series of tariffs, the tools of economic policy haven’t changed—escalation still relies on the same mechanics. Under Biden, there was no real departure from tariff frameworks; in fact, there were developments involving tech restrictions and tax-related moves that kept pressure on. The possibility of a renewed Trump term adds a sharper edge, especially with a 60% levy hanging in the air. This changes the pricing of risk dramatically—we see that through forward-looking volatility curves and international hedging strategies.

From where we sit, the focus over the next few trading weeks ought to shift towards cost inflation projections and global logistics rotation. If tariffs are perceived as more than empty threats, then the reverberations would extend far beyond China’s borders. Already, anticipatory moves are evident in equity-linked options and certain commodity-backed derivatives. Supply chains do not correct overnight, and markets tend to price disruptions even before they’re official, which means those holding longer-dated contracts should build cushions and consider delta exposures that reflect premium distortions.

Keep in mind, any overt policy proposal—such as Trump’s tariff hike suggestion—doesn’t act alone. It often sets off secondary expectations: higher input prices, potential retaliation, and softer corporate margins. These scenarios leak into earnings forecasts and inflation bets, which then flow into derivatives.

For us, what matters now is watching where capital rotates. If traders start hedging more aggressively in Asia-based ETFs or increasing put ratios on consumer discretionary indices, it’s likely they’re bracing for consumption drag. The knock-on effect is felt through heightened implied volatility, particularly where exposure to trade-heavy firms is high.

Additionally, keep an eye on how the bond market digests these warnings. If investors begin demanding higher yields on mid-term Treasuries, it would suggest concerns about inflationary pressure and policy missteps. That kind of macro signal often feeds directly into the swaps and futures space, where positions adjust well before any material policy action occurs.

Overall, we should act with sharper attention to spreads and implied correlations rather than reacting purely off headlines. When political pronouncements turn market-relevant, it’s not about what’s said but how instruments digest that shift. We’re not in new territory, but we are certainly in a phase where earlier patterns could reassert themselves in unexpected ways.

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