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The Chinese trade surplus versus the US amounts to approx. USD 300 billion so one billion is more like a rounding imprecision.
Yes, we meant Last week, the trade protectionism theme shot back into focus as a potential major left tail risk for markets which got further aggravated by the subsequent retaliatory rhetoric from Europe and Asia. President Trump has followed through on his promise to impose tariffs on steel and aluminum imports but alleviated the worst of the retaliation fears by excluding Canada and Mexico and leaving the door open for other US trade partners to be given similar exemptions. With risk on-risk off flip-flopping throughout the week gamma returns under delivered (see 1st chart).
Sell elevated implied correlations USD correlations between high and low beta FX via dual digitals or worst-of baskets as defensive trades. A set-up that seems favorable for betting on the divergence between reserve and high beta currencies via short USD correlation structures.
To directly take advantage of elevated implied USD correlations from 2nd chart while hedging against a potential escalation of trade clashes, one could opt out for de-coupling views expressed via dual digitals.
Admittedly, it is difficult to anticipate the exact global dynamics that may play out (with EM Asia possibly getting stuck in a limbo between deteriorating global conditions and central banks interventions), so the analysis focuses on G10 FX and the most directly impacted EM (MXN and BRL).
Among reserve currencies, JPY, EUR, and CHF are of interest as primary safe haven currencies while GBP is bucketed with high beta G10 amid ongoing political vulnerability in the UK and with Britain being one of the trade partners directly impacted by the steel and aluminum tariffs.
Bullish JPY was well subscribed-to even before the February equity shock and both spot and vol there have run up a fair bit, hence, better value in fresh de-correlation plays is to be found in EUR-crosses.
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