Still Standing

May 06, 2025
6 min read
  • The US economy is surprisingly resilient. Still, the fundamental backdrop remains difficult for USD.
  • Currency appreciation in exchange for a trade accord with the US is one of our central global macro themes.
  • China private sector services activity worsened in April.

Please see our Drivers for the Week for an in-depth look at what markets are facing this week.

 

Still Standing

US

USD is trading with no clear direction within a narrow range. The US economy is surprisingly resilient. The ISM Services index unexpectedly increased in April to a two-month high 51.6 (consensus: 50.2) vs. 50.8 in March. The details were mixed. The New Orders, Employment, Supplier Deliveries subindexes improved but the Business Activity Index declined to a 10-month low. Also, the Prices Index increased to a 26-month high at 65.1 vs. 60.9 in March, indicative of rising inflation pressures.

USD has likely entered a short-term period of consolidation after undershooting the levels implied by US-G6 2-year bond yield spreads. Nevertheless, the fundamental backdrop remains difficult for USD: the Trump administration implicitly supports a weaker dollar, the US economy faces stagflation risk, and US policy credibility has been undermined by the trade war.

The US March trade balance is due today (1:30pm London). The goods and services deficit is expected to widen to a record -US$137.2bn vs. -US$122.7 in February as firms ramped-up imports to get ahead of tariffs. Anticipated reciprocal tariffs were announced on April 2 but paused for 90 days a few days later. The tariffs are set to go back into effect on July 9. Meanwhile, Canadian Prime Minister Mark Carney meets with President Donald Trump today to discuss trade and security.

TAIWAN & CHINA

TWD retraced some of its historic gains on central bank intervention. Taiwan's central bank governor stated that the bank had “intervened appropriately” after TWD surged the most since the 1980s. The sharp rally in TWD was sparked by speculation Taiwan authorities will allow TWD to appreciate as part of a possible trade deal with the US. Unsurprisingly, Taiwan’s central bank governor denied that the US asked Taiwan to lift the value of its currency.

Currency appreciation in exchange for trade accord is one of our central global macro themes. Specifically, a grand bargain between the US and China – one that devalues the dollar against the Chinese renminbi (CNY) – is very much on the table. This could help President Donald Trump achieve his core goal to revitalize American manufacturing activity and help China rebalance its economy away from investment towards consumption. See here for details.

US Treasury Secretary Scott Bessent said yesterday “I think we could see substantial progress” in US-China trade negotiations in the coming weeks. Stay tuned...

USD/CNH is a little firmer after falling briefly under 7.2000 yesterday to its lowest level since early November. The rally in TWD turbocharged CNH. China private sector non-manufacturing business survey weakened more than expected in April. The Caixin services PMI dropped to a seven-month low at 50.7 (consensus: 51.8) vs. 51.9 in March. Last week, the Caixin manufacturing PMI dipped to a three-month low at 50.4 vs. 51.2 in March which helped pull the composite PMI down 0.7pts to 51.1. The impact of the trade war is starting to be felt by China. Expect more stimulus measures in the coming weeks.

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