AUDUSD Eyes Breakout — Yearly High Under Pressure

China is widely expected to leave its benchmark lending rates unchanged at the monthly fixing on Monday, a Reuters survey showed, but markets are wagering on more stimulus being rolled out soon in the face of an escalating Sino-U.S. trade war.

Policymakers have to walk a tight rope as the yuan has come under pressure after U.S. President Donald Trump's tariff onslaught, while shrinking interest margins at lenders has continued to limit the scope for monetary easing.

The loan prime rate (LPR), normally charged to banks' best clients, is calculated each month after 20 designated commercial banks submit proposed rates to the People's Bank of China (PBOC).

In a Reuters survey of 31 market watchers conducted this week, 27, or 87% of all respondents expected both the one-year and five-year LPRs to remain steady, while the remaining four participants projected a reduction of 10 to 15 basis points to the five-year rate.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgages.

China last cut its policy rate in September and benchmark LPRs in October.

"I don't think there will be a LPR cut (this month)," said a trader at a wealth management firm.

"They will need to lower the deposit rates first."

A reduction to the banks' deposit rates could alleviate net interest margin pressure at lenders and allow them to lower lending rates.

China's gross domestic product (GDP) grew 5.4% in the first quarter, beating expectations, but markets fear a sharp downturn in the year ahead as U.S. tariff policies pose the biggest risk to the Asian powerhouse in decades.

Indeed, export data was yet to capture the impact from higher tariffs as many factories front-loaded their orders to beat the duties, analysts said.

Trump has raised tariffs on Chinese goods to a massive 145%, prompting Beijing to retaliate with higher 125% duties on U.S. goods in a tit-for-tat trade war that has roiled investors.

Market participants still expect some monetary easing measures in coming months to support the broad economy and cushion the impact of U.S. tariffs.

Any moves to boost stimulus, however, will require policymakers consider the impact on the yuan, which is down 0.4% against the dollar since Trump's April 2 announcement of global tariffs.

"To bolster domestic financial and property markets while promoting yuan internationalization, Beijing most likely won't allow a sharp yuan depreciation against the dollar," said Ting Lu, chief China economist at Nomura.

Source: Yahoo Finance

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In a stark downturn, the US stock market lost more than $1.5 trillion in value on April 17, 2025, following warnings from Federal Reserve Chairman Jerome Powell about economic growth and tariffs.

Impact on the US Stock Market

The US stock market experienced a severe downturn attributed to concerns over economic growth and tariffs. Jerome Powell's comments about future economic challenges resulted in swift reactions, with the market witnessing a notable decrease in value.

Jerome Powell stated that tariff increases could sharply impact the economy. US–China tensions particularly strained the tech sector, leading to significant losses. The immediate impact saw tech stocks retracting substantially.

Technology Sector Strain

This event critically affected the technology sector, with companies facing renewed tariff implications. Key industry players noticed a marked increase in market volatility as investors reacted swiftly to the economic forecast.

Experts highlight potential repercussions including increased volatility in the crypto markets, which are tightly linked to traditional financial assets. Historical trends suggest early-stage volatility, potential for rebounds, and strategic investor realignments.

Future Economic Implications

Financial experts suggest this market event may bolster future discussions on global economic policies. The volatility casts a spotlight on links between traditional and crypto markets, echoing patterns seen in past economic disruptions.

Source: CryptoSlate

Bloomberg Economics’ in-house model SHOK shows that weaker oil prices and a stronger pound could dampen inflation by an average of 0.4 percentage points over the next year. SHOK broadly matches the key dynamics of the BOE’s own model.

The moves on markets are likely to play a key role in the projections that the BOE will reveal alongside its next rates decision on May 8. In February, the bank forecast inflation would peak at 3.7% — almost double the 2% target — and officials have continued to caution against cutting rates too quickly. However, investors have ramped up bets since Trump announced sweeping tariffs on April 2 and are now pricing in three reductions this year with a 50% chance of a fourth.

“The fall in energy prices since the BOE’s February forecast, and to a lesser extent the appreciation of the pound, will act as a disinflationary impulse on the economy over the next year,” said Ana Andrade, UK economist at Bloomberg Economics. “There’s a question mark around whether these moves will stick. If they do, we think energy moves could chop off 0.3 percentage points from headline inflation in 3Q25. Our forecast has it peaking at around 3.5% then.”

Key to the BOE’s latest projections will be how persistent rate-setters expect inflationary pressures to be. They are weighing stubbornly high wage growth and rising inflation expectations against Trump’s tariffs slowing global demand and tightening financial conditions.

Recession fears and OPEC’s plans to boost oil production have sent Brent crude — the benchmark UK oil price — sliding by about $14 per barrel to around $66 compared to the average during the BOE’s last forecast round. Tumbling gas prices also likely to lower household energy bills later this year.

“Since April 2 all these things have happened which in practical terms for a country like the UK are disinflationary because there’s a big demand hit but there’s also commodity price moves,” said Tomasz Wieladek, chief European economist at T. Rowe Price.

Policymakers have pointed out in recent weeks that the exchange rate is one channel that could affect inflation in both directions. However, it is currently more likely to depress the cost of imports with sterling up by about 2% against a trade-weighted basket of currencies since the BOE’s February forecast round after a dollar rout.

“We struggle to see how the overall impact of US tariffs on UK inflation is anything but disinflationary,” said Bruna Skarica, chief UK economist at Morgan Stanley.

Economists expect the BOE to predict a lower inflation peak. The median of estimates in a Bloomberg survey this month was for inflation to reach 3.3% in the third quarter before subsiding.

The darkening growth backdrop has prompted investors to step up bets on a quicker easing from the BOE, a shift fueled further by softer inflation and jobs data earlier this week. Moves on money markets suggest that back-to-back cuts in May and June are seen as possible by investors.

Wieladek said markets are underestimating the odds of bigger cuts to borrowing costs, saying the BOE will likely need to push interest rates below their neutral level and into stimulative territory.

Source: Bloomberg Europe

When the flames of a "trade war" break out, the public's attention is often focused on the ever-increasing tariff rates, the rising and falling trade deficit figures, or the verbal sparring at the negotiating table.

However, these are only the parts of the iceberg that float on the surface. Beneath the turbulent sea, a deeper and more structurally destructive undercurrent is surging, which concerns the foundation of the production structure, the survival of investment, and the fate of countless companies and individuals.

The core of this undercurrent lies in the vulnerable exposure of "resource specificity" in the economic system.

In this network, many resources, whether machinery and equipment, factories, technology patents, human capital, or supply chain relationships, are deeply customized and optimized to serve specific trading partners and specific market needs. Once they leave the preset trading environment, their value may shrink sharply or even return to zero.

Dedicated production factors

Before discussing the impact of the trade war, we must first understand the concept of "resource specificity" and its significance in international trade. Economic theory tells us that specialized division of labor is the key to improving production efficiency and promoting economic growth. In the era of globalization, this division of labor has crossed national borders and formed a complex international industrial chain and value chain. Countries, regions, and companies focus on specific links or specific products in the production chain based on their own comparative advantages.

In order to achieve maximum efficiency in specialized division of labor, companies often make a lot of "specialized investments". This means that the resources invested (capital goods, manpower, technology, etc.) are highly customized to adapt to specific production processes, specific partners or specific end markets. This specialization can be reflected in multiple levels:

1. Specificity of physical capital: The machinery, equipment, molds, and production lines purchased by the enterprise may only be suitable for producing products that meet the standards, specifications, or designs of a specific country (such as the United States).

For example, electrical appliances produced for the US market need to comply with its voltage and plug standards; factories that produce for specific US brands may have their production lines built entirely around the product features and quality requirements of that brand. Once the US market is lost, it may be difficult or costly to convert these devices to produce products for other markets.

2. Site specificity: The location of the factory may be close to a specific port, logistics hub or key supplier serving the US market. This geographical location optimization is to minimize the logistics cost and time of trade with the US. If trade with the US is interrupted, this location advantage may disappear or even become a disadvantage (for example, far away from the new target market).

3. Specificity of human capital: The skills, knowledge and experience accumulated by employees may be highly concentrated on serving the U.S. market. This includes familiarity with the regulatory standards, consumer preferences, business practices, specific process technologies, and even the language skills and cultural adaptability of sales and customer service teams. After losing the U.S. market, the value of these specific human capital will be greatly reduced, and employees will face difficulties in changing jobs or skill depreciation.

4. Special assets: An investment made by a company is based on the expectation of long-term cooperation with a specific American customer. For example, in order to meet a huge order from a major American customer, the factory is expanded and a production line is added. The payback period of such an investment is often long and highly dependent on the stability of the relationship with the specific customer. Once the relationship breaks down (such as the customer shifting orders due to a trade war), the assets "locked" for the specific customer will face huge risks.

In an era of rapid globalization, resource specificity is the source of efficiency. It enables enterprises to provide high-quality and low-cost products through economies of scale, learning curve effects and lean production, and deeply integrate into the global value chain. However, behind efficiency lies huge risks.

A high degree of specificity means a high degree of dependence and vulnerability. When the international political and economic environment undergoes drastic changes, trade barriers rise, and even "decoupling" becomes a reality, this specificity will turn from an engine of efficiency into a shackle and trap for enterprises.

Decoupling shock wave

As Sino-US trade frictions escalate and the tariff war evolves into deeper technological blockades, investment restrictions and even comprehensive "decoupling" threats, the impact on Chinese companies that have invested a lot of dedicated resources in the US market is direct and cruel.

Demand has plummeted: The closure or significant shrinkage of the US market means that these companies have instantly lost their main or even only source of income. Orders have disappeared, sales have plummeted, and cash flow has dried up.

Collapse in the value of dedicated resources: This is the core of the problem.

Machines may become scrap metal. Production lines, molds, and testing equipment customized for American standards have become useless overnight. They cannot easily switch to producing products for domestic sales or other national markets because the standards, specifications, and design requirements may be completely different. The cost of transformation may be high, even exceeding the cost of purchasing new equipment. In the context of lack of demand, the market value of these once valuable fixed assets is rapidly approaching the scrap recycling price. They are no longer "capital" that can generate cash flow, but have become heavy "liabilities" (occupying space and requiring maintenance).

Some of the workers’ skills will become obsolete.

Workers with specific skills to serve the US market suddenly found that their "special skills" became redundant. Engineers familiar with US UL certification, designers proficient in US clothing sizes and fashion trends, and sales representatives who are good at communicating with US customers, their professional knowledge may be useless in the new market environment. They are facing unemployment or must accept a significant pay cut and do more general jobs that do not require these specific skills.

There will also be a breakdown in the network of relationships.

The supplier network, logistics channels, and partnerships built around exports to the United States also collapsed with the interruption of trade. These intangible "relationship capital" are also highly specific, and their value has also disappeared.

The huge sunk costs will have huge destructive power.

In economics, "sunk costs" refer to investments that have already been made and cannot be recovered. For companies that have made a lot of specialized investments, these investments are huge sunk costs. When the market environment suddenly changes and these specialized resources cannot be used for other purposes, business owners face catastrophic losses. They cannot recover part of the value through sales or leasing like they do with general resources (such as standard factory buildings and general equipment). The higher the specificity, the greater the proportion of sunk costs, and the weaker the company's ability to buffer shocks.

This will lead to debt crisis and bankruptcy.

Many companies often take out bank loans or other forms of debt during their expansion, especially when making special investments. When revenues plummet and asset values ​​collapse, companies will be unable to repay their debts. The low residual value of special assets means that even bankruptcy liquidation will have difficulty covering debts. This not only leads to the closure of the company, but is also likely to leave the business owner with heavy personal debts or even bankruptcy.

Therefore, under the shadow of the trade war moving toward decoupling, the Chinese companies that are most "tailored" for the US market are at the greatest risk of bankruptcy. This risk is not necessarily proportional to the size of the company, but is proportional to the degree of "resource specificity" and dependence on the US market. A small but highly specialized foundry may be far more vulnerable than a large-scale company with diversified markets and highly universal products.

Dominoes

The collapse of a company is not an isolated incident. Like a falling domino, it will trigger a series of chain reactions, ultimately affecting the entire labor market and the macro-economy.

The entire impact path is as follows:

First, structural unemployment occurs.

The first to be affected are those who worked in bankrupt companies. Since their skills are often highly "human capital-specific", it is difficult for them to find new jobs with the same skill requirements and salary levels as their original ones in a short period of time. This has caused structural unemployment - the skills of the unemployed do not match the job requirements in the market.

Second, there will be a phenomenon of labor being squeezed into general fields.

In order to make a living, unemployed workers have to flock to industries or positions that require relatively low skills and are more versatile. For example, a skilled worker who used to work in a precision electronics factory may have to apply for a courier or food delivery job, or enter the service industry to do simple labor.

Third, there will be a decline in wages in general sectors.

A large number of workers have poured into general-purpose fields, greatly increasing the labor supply in these fields. In the absence of a corresponding increase in labor demand (which may even decrease due to the overall economic downturn), based on the basic relationship of supply and demand, wage levels in these fields will inevitably be under downward pressure. Workers who originally worked in these fields will also face more intense competition and the risk of stagnant or even declining wage growth.

Fourth, it will ultimately affect the entire economy, leading to a decrease in the overall average wage level.

On the one hand, high-paying specialized jobs are disappearing; on the other hand, a large number of workers are pouring into low-paying general jobs, further lowering the wages of these jobs. The combination of these two factors has led to a downward trend in the average wage level of the entire society or region. This decline not only affects the unemployed and those who have changed jobs, but also affects a wider range of people through the transmission mechanism of the labor market. Even those industries that seem to have nothing to do with the trade war may feel the pressure of wage increases reduced due to the increase in the overall supply of the labor market.

This process clearly reveals that the impact of the trade war is not only the increase in unemployment, but also the reshaping of the labor market structure and the erosion of overall wage levels. This impact is far-reaching and painful, and it is directly related to the well-being of ordinary people and social stability.

The annihilation of capital

In addition to direct bankruptcy and unemployment, trade decoupling may also trigger a more insidious but more far-reaching phenomenon: the annihilation of capital. This refers not only to the zeroing of the value of specialized capital goods, but also to the actual losses caused by the long-term idleness of general-purpose capital goods.

First, the dedicated capital is completely scrapped.

As mentioned earlier, once highly specialized machinery and equipment loses the specific market it serves, it becomes virtually obsolete. This portion of social wealth evaporates, representing a permanent loss of past investment.

Accelerated depreciation and idle costs of general capital: Even some relatively general capital goods (such as standard factory buildings and general machine tools) may face long-term idleness in an environment of overall economic downturn and shrinking demand. Idleness itself has costs.

It will also bring various physical losses. If the machinery and equipment are not used for a long time and lack maintenance, they will age, rust and damage faster. If the factory building is vacant, it will also deteriorate faster.

In an era of rapid technological iteration, even if idle equipment is not physically damaged, it may quickly lose its competitiveness due to technological upgrading. When the economy recovers and demand picks up, these long-idle equipment may be outdated and unable to meet new production requirements.

Ultimately, the capital stock of society as a whole will decrease.

The scrapping or accelerated depreciation of a large number of capital goods (whether specialized or general-purpose) means that the overall capital stock of society is decreasing. At the same time, the huge uncertainty and pessimistic expectations brought about by the trade war will severely hit the willingness to make new investments. After witnessing the huge risks of specialized investments, business owners will become more cautious and tend to hold cash rather than make new capital expenditures, especially those with long payback periods and strong specializedness. This "capital strike" phenomenon will inhibit capital formation and hinder the recovery and development of productivity.

Through this chain of cause and effect, we can ultimately infer the result, which is a decline in productivity and a long-term slump in wage rates.

Economic theory shows that per capita capital stock is one of the key factors determining labor productivity. When the capital stock decreases and capital formation is hindered, the average capital equipment owned by each worker will decrease, which will inevitably lead to a decline in labor productivity. In the long run, the overall wage level of a country or region is ultimately determined by its labor productivity. Therefore, the annihilation of capital and the suppression of capital formation will eventually translate into long-term stagnation or even decline in the overall wage rate. This is different from the wage decline caused by changes in labor market supply and demand discussed earlier. The latter is a structural and relatively short-term adjustment, while the former is a longer-term trend impact based on productivity.

In short, trade decoupling not only wipes out current dedicated investment, it also erodes the capital base of the entire economy through idleness, depreciation, and disincentives for new investment, causing lasting damage to future productivity and wage levels.

What to do in the face of decoupling?

Applying the above theoretical framework to the reality of Sino-US trade frictions and decoupling risks, we can more specifically depict the difficulties that Chinese companies may face, as well as a group portrait of "who is most nervous."

Over the past few decades, China has been deeply integrated into the global value chain with the United States as an important terminal market, relying on its labor cost advantages, improved infrastructure and growing industrial clusters. Many Chinese companies, especially export-oriented companies in the southeast coastal areas, are highly dependent on exports to the United States for their survival and development. Among these companies, there are many cases of highly specialized investments for the US market:

Electronic information industry: Companies that manufacture or provide parts for American brands such as Apple, Dell, and HP strictly follow the requirements of American customers in terms of production lines, technical standards, and quality control systems. Some core parts may only be suitable for products of specific American brands.

Textile and clothing industry: A large number of clothing factories produce according to the size, fashion trends and seasonal needs of the US market. Their design, fabric procurement and production scheduling are all based on orders from US customers.

Home furnishings, toys, and daily necessities: These industries also need to meet U.S. safety standards (such as CPSC), environmental regulations, and consumer preferences. Production molds, raw materials used, and product designs are all quite specific to the U.S. market.

Equipment manufacturing industry: Some companies that provide supporting parts for specific industries in the United States (such as energy and construction machinery) also have product specifications and technical parameters that meet "American standards."

When the Sino-US trade war broke out and tariff barriers were erected, these Chinese companies that are highly dependent on the US market and have strong resource specificity are undoubtedly the most nervous group standing on the edge of the cliff.

The most tense group portrait came out:

1. Export business owners who are highly dependent on the US market: They have invested their life savings or even borrowed money to build production lines and teams that serve the US market. Decoupling means that their assets may be reduced to zero overnight, and they face the risk of bankruptcy or even personal financial destruction. They are the most direct bearers of pressure and potential biggest losers in this storm.

2. Employees who work in these companies and have specialized skills: especially those technical backbones, core managers, senior sales, etc., whose careers are closely linked to the fate of the company. Once the company goes bankrupt or transforms, their specialized human capital will depreciate significantly, and they will face unemployment, salary cuts, and difficult career transitions.

3. Domestic suppliers that provide supporting services for these export enterprises: The products or services of these suppliers may also be customized around the final export to the US market. Their fate is closely related to the downstream export enterprises.

4. Financial institutions that provide loans to these enterprises: especially banks or non-bank financial institutions that have inadequate risk assessments and are overly concentrated in certain export industries, will face the risk of a surge in non-performing loans.

5. Local government officials: Especially those regions that rely heavily on export-oriented economy and where tax revenue and employment are highly concentrated in affected industries, they are facing tremendous pressure from economic downturn, reduced fiscal revenue, rising unemployment rate and social stability.

Faced with the risk of decoupling, Chinese companies certainly cannot sit idly by and need to actively seek ways to deal with it.

The most important thing is market diversification.

Vigorously explore global non-US markets, especially other regional markets such as the EU and ASEAN, to reduce dependence on a single market.

However, the development of new markets requires time and costs, and may not fully absorb the volume and profit margin of existing exports to the United States. The standards and demands of different markets also vary, requiring new dedicated investments.

Second, turn to the domestic market. China has a huge domestic market, which is a huge strategic depth. Many export companies try to "transform foreign trade into domestic sales." But this also faces considerable challenges, because the domestic market is highly competitive, channel construction is difficult, brand awareness is low, consumer preferences are different, and quality standards and cost control need to be re-adapted.

Despite these countermeasures, the pain of transformation is severe and inevitable for companies with highly specialized resources and large ships that are difficult to turn around. The trade war and the risk of decoupling are forcing China to painfully reshape certain specific economic structures that have been formed over the past few decades.

Back to the original question: Who is most nervous in the trade war?

To sum up: the answer is not simply "China" or "the United States," nor is it a general "industry." The most nervous are the business owners, investors, and workers who have staked their lives on specific trading partners in the global division of labor system and have made a large number of irreversible and non-convertible dedicated investments.

Against the backdrop of the current Sino-US trade frictions and decoupling risks, Chinese entrepreneurs who are highly dependent on the U.S. market and whose production equipment, technology, human capital and even business models are deeply tied to U.S. demand are undoubtedly the most nervous group.

For them, trade decoupling does not simply mean a reduction in income, but a crisis of survival. Their specialized resources are at risk of being scrapped, their businesses may close down, and they may go bankrupt.

The resulting wave of unemployment will impact the labor market and lower the overall wage level through the "crowding out effect." Capital goods that are idle or even destroyed will damage the economy's long-term production potential and further reduce wage rates.

This resource-specific vulnerability analysis reveals the deep destructive power of the trade war.

It goes beyond tariff calculations to the very foundations of economic structure, and reminds us that the efficiency gains of globalization come at the expense of a certain resilience.

When the international political and economic order undergoes drastic changes, those economic units that were most "optimized" and "dedicated" under the old order are often the most vulnerable, most painful and most "tense" parts of the new changes.

Only by understanding this can we more deeply realize the true cost of the trade war, which is not just the fluctuations in macroeconomic figures, but also the ups and downs of the fate of countless micro-entities and the price that must be paid for economic structural adjustments.

For China, only by breaking the convention, increasing openness and implementing unprecedented opening-up measures can it help the "most nervous" companies and individuals achieve a smooth transition and transformation.

Don't solve the problem by printing money.

Source: NetEase Finance

Germany's two-year bond yield (DE2YT=RR), which is sensitive to ECB rate expectations, dropped to 1.671% from around 1.81% just before the decision. It was last trading down 8 basis points (bps) at around its lowest since late 2022.

The ECB cut rates by 25 bps to 2.25%, its seventh reduction in a year as inflationary pressures dwindle and Trump's tariffs threaten to damage an already fragile euro zone economy.

"The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports," ECB President Christine Lagarde told a press conference.

She also said the recent strengthening of the euro, as the dollar has dropped, could push down inflation by cheapening imports.

Germany's 10-year bond yield (DE10YT=RR), the benchmark for the euro zone bloc, was last down 4 bps at 2.459%, having traded 3 bps higher before the decision.

Money markets were last pricing in an ECB main rate of roughly 1.57% by the end of the year, down sharply from 1.71% before the announcement.

"Overall, this was clearly a dovish meeting," said Max Stainton, senior global macro strategist at Fidelity International.

"The (ECB) General Council's statement and President Lagarde’s comments in the press conference clearly show(ed) an awareness that growth and inflation risks are both moving to the downside."

Bond markets have been volatile since Trump announced sweeping tariffs on April 2, even after he rolled most of them back, as investors struggle to gauge where his policies are headed.

Trump said there was "big progress" in preliminary talks with a Japanese trade delegation in Washington about the barrage of tariffs he has imposed.

Investors have favoured German bunds as a safe-haven asset, helping yields fall to their lowest since chancellor-in-waiting Friedrich Merz announced a dramatic boost in government spending in early March.

Italy's 10-year yieldwas last down 5 bps at 3.639% - around its lowest since early March.

The closely watched gap between Italian and German yields (DE10IT10=RR) stood at 118 bps. Last week, credit rating agency S&P upgraded Italy's long-term ratings to "BBB+" from "BBB".

Source: TradingView