US-China trade war: market complacent in underpricing ‘no deal’

Options or swaps said to still be cheap to hedge if tensions persist

US-china commodities
US-China spat: market has been underpricing the risk of a ‘no deal’

The foreign exchange market has for months underpriced the risks of the US and China failing to strike a trade deal, and is now grappling with rising volatility in yuan-related markets following the US decision to raise duties on its competitor, say market participants.

On May 10, the US imposed 25% tariffs on $200 billion of Chinese imports, up from the previous 10%. However, the market had been underpricing the risks of a ‘no deal’ in the past few months.

The monthly average daily volume

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