Huatai Securities: Multiple factors driving the US dollar lower

According to the VESYNC APP, Huatai Securities released a research report stating that there were many overseas macro events worth paying attention to during the May Day holiday. Some financial asset prices experienced significant adjustments, but overall, overseas macro events support a marginal rebound in global risk appetite. The most noteworthy asset price changes may include the decline in the US dollar and US bond yields, the appreciation of the RMB, and Hong Kong stocks leading globally.

Key points from Huatai Securities:

Overview: During the May Day holiday, there were many overseas macro events worth paying attention to. Some financial asset prices experienced significant adjustments, but overall, overseas macro events support a marginal rebound in global risk appetite. The most noteworthy asset price changes may include the decline in the US dollar and US bond yields, the appreciation of the RMB, and Hong Kong stocks leading globally. Additionally, major macro events that have significant market impact include Fed Chairman Powell's notably dovish remarks at the May FOMC meeting, the US April non-farm payroll data significantly falling below expectations for the first time in several quarters, and the Bank of Japan's apparent interventions to curb the rapid depreciation trend of the yen against the US dollar. From an economic data perspective, the global manufacturing cycle continues to show signs of recovery, and South Korea's April export data confirms this. Global PMI data for April shows that outside the US, overall economic sentiment is improving and outperforming the US. From a fundamental perspective, this change also supports the marginal weakening of the US dollar, the resurgence of rate cut expectations by the Fed, and the performance of risk assets.

1. Policy: FOMC Eases Rate Hike Concerns and Still Anticipates Rate Cuts Later This Year, Bank of Japan Appears to Intervene in Exchange Rates Multiple Times

The May FOMC meeting was overall dovish, with Powell stating that the likelihood of further rate hikes is low, and the Fed announced that it will begin slowing the balance sheet reduction in June. Looking ahead, the Fed has outlined two possible conditions that could trigger rate cuts - a cooling labor market or a decline in inflation, but has not provided corresponding scenarios for possible rate hikes in the near term. The most important outcome of this FOMC meeting is that it "narrowed down" the speculation on the Fed's policy path, shifting from a more "divergent" path including rate hikes to a "divergence only in the timing of rate cuts," which is beneficial for reducing market risk premiums and volatility.

Fluctuations in the yen exchange rate and data from the Japanese Ministry of Finance show that the Bank of Japan may have intervened in the foreign exchange market multiple times between April 29 and May 3, with a scale possibly reaching $60 billion, close to the total scale of three interventions accumulated in 2022. Looking ahead, whether the rapid depreciation of the yen will continue to boost inflation expectations or begin to "backfire" on economic and liquidity confidence is a key consideration for the Bank of Japan in deciding whether to tighten monetary policy to curb further depreciation.

In addition, most ECB members agree on starting rate cuts in June, but the specifics may depend on the data and may adopt a non-continuous rate cut approach.

2. Data: Global manufacturing cycle continues to recover, US growth momentum weakens marginally, non-farm payroll falls short of expectations

The April non-farm payroll data was the first significant data point since February to significantly increase the probability of rate cuts. In April, the US added 175,000 new non-farm jobs, below Bloomberg's consensus expectation of 240,000; hourly wages fell to 0.2%, below Bloomberg's consensus expectation of 0.3%; and average weekly working hours slightly decreased to 34.3 hours The latest non-farm payroll data shows that while the US growth remains resilient, it may no longer be accelerating marginally, and inflation, especially labor inflation that the Federal Reserve is concerned about, is still on a downward trajectory. Given that the decline in non-farm payrolls is one of the conditions for the Fed to cut interest rates, the better-than-expected drop in April non-farm payrolls will raise the probability of a rate cut in July to around 50%.

Furthermore, the global manufacturing cycle continues to recover. The global PMI in April remains above 50, with South Korea's April exports growing significantly by 13.8% year-on-year. The Eurozone's growth in the first quarter was better than expected, and core inflation in April was slightly higher than expected. Japan's industrial production rebounded in March, indicating that the disruptions caused by some automakers delaying production have subsided, but real consumption growth remains weak.

Risk Warning: Global manufacturing cycle recovery falls short of expectations, and US inflation sticks higher than expected