Offshore USD/CNH rose 1.1% to 7.4257, a new lifetime high. The People’s Bank of China set the onshore USD/CNY daily reference rate to 7.2038 yesterday, its highest level since September 2023. China stood by its decision to retaliate with an equivalent 34% tariff, mirroring the rate the US imposed on China on Liberation Day. The Commerce Ministry said China would “fight to the end” against US “blackmail.” With China not backing down, US President Donald Trump scrapped meetings with China and will likely lift tariffs on Chinese imports by another 50% to 104% today, which will likely prompt another response from China.
While this morning’s fixing was higher at 7.2066, it was lower than the 7.3348 estimated by markets, sending USD/CNH down to 7.38. It remains to be seen if the PBOC will abandon its calibrated approach to keep USD/CNY basically stable and discourage one-way depreciation bets. After Governor Pan Gongsheng assumed office in July 2023, the spot rate has weaned off the fixing, fluctuating more within the upper half of its trading band around its fixing, which has been stable between 7.0074 and 7.2150.
Investors sentiment deteriorated again due to the intensifying trade conflict between the world’s two largest economies, which together account for more than a third of the world economy. US stagflation fears lifted the US Treasury 10Y yield by 10.9 bps to 4.29% and sent the S&P 500 Index below 5000 for the first time since April 2024. Despite the futures market pricing a more than 100% chance for a Fed cut in June, Fed officials viewed tariffs as posing a higher risk to inflation than growth for now. That did not prevent demand worries from extending the decline in WTI crude oil prices below USD60/barrel, four days after they took out 65, a three-year support level. In the currency market, global risk aversion leads investors to reduce exposure to the AUD and NZD, opting instead for traditional havens such as the JPY and CHF. The OIS market priced in more than 60% probability for the Swiss National Bank to lower rates to 0% at its June meeting.
Investors are also monitoring the backlash against Trump’s trade policies. US lawmakers on the Senate Finance Committee grilled US Trade Representative Jamieson Greer over the escalating trade dispute with China. Senator Ron Wyden (Democrat-Oregon) said there was no strategy at all regarding China. Senator Thom Tillis (Republican-North Carolina) asked whose throat should be choked if the gamble proved wrong. For example, President Trump and his administration were dissatisfied with the offers from the European Union and Vietnam to eliminate tariffs on US imports. The “Hands Off” protests across America, which reflected public dissent against the Trump administration’s policies, have garnered international attention. Similar protests also started in European cities – Berlin, Frankfurt, Paris, London, and Lisbon. On April 3, Senators Chuck Grassley (R-Iowa) and Maria Cantwell (D-Washington) introduced a bipartisan Trade Review Act 2025 that sought to reassert Congress’s constitutional authority over trade policy by requiring the president to notify Congress within 48 hours of imposing new tariffs and providing 60-days for congressional review and approval.
Overall, the escalating trade tensions between the US and China, coupled with the emerging backlash to the Trump administration’s policies, have increased “on again, off again” two-way risks and divergences in the currency markets.
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“Although the world is full of suffering, it is also full of the overcoming of it.”
Hellen Keller
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