Core Viewpoint - The Australian dollar (AUD) has experienced a slight decline against the US dollar (USD), primarily due to reduced market activity as the weekend approaches, leading to cautious trading behavior among investors [1]. Exchange Rate Movement - The AUD/USD exchange rate fell by 0.03% to 0.6520, retreating from a high of 0.6527 earlier in the week [1]. - The current exchange rate is slightly above the 55-day moving average of 0.6511, which provides temporary support [3]. Monetary Policy Expectations - The market is focused on the upcoming Reserve Bank of Australia (RBA) monetary policy meeting, with expectations of a 25 basis point rate cut to address economic slowdown [3]. - Recent economic data from Australia indicates weakened domestic growth, with consumption and investment growth below expectations, and signs of cooling in the job market [3]. Potential Impacts of Rate Cuts - A rate cut by the RBA could exert downward pressure on the AUD, as lower interest rates reduce the yield on AUD assets, potentially leading to capital outflows [4]. - If the RBA's rate cut exceeds market expectations or signals a more accommodative policy, the AUD may experience further declines; conversely, if the RBA maintains rates or suggests limited future cuts, the AUD could rebound [4]. US Federal Reserve Developments - The appointment of Stephen Moore as a temporary member of the Federal Reserve Board may influence market perceptions of the Fed's policy independence and stability [5]. - If Moore advocates for policies aligned with the Trump administration's economic philosophy, it could decrease the attractiveness of the USD, indirectly supporting the AUD [5]. Factors Influencing AUD/USD Exchange Rate - The AUD/USD exchange rate is influenced by interest rate differentials, economic fundamentals, and global risk sentiment [6]. - A rate cut by the RBA, coupled with a stable or increasing rate from the Fed, could widen the interest rate differential unfavorably for the AUD [6]. - The performance of global commodity markets, particularly prices of iron ore and coal, significantly impacts the AUD, as it is a commodity currency [6].

Core Insights - The linkage between the Korean won and the Chinese yuan is becoming increasingly tight, with fluctuations in the yuan likely to impact the won, especially during periods of global uncertainty caused by trade wars [1][2] - Since 2018, the correlation between the won and yuan has averaged around 0.6, with notable periods of increased correlation during the U.S.-China trade tensions and the aggressive interest rate hikes by the Federal Reserve [1] - The sensitivity of the won to the yuan may increase if former President Trump implements stricter trade protection policies during a potential second term, complicating Korea's monetary policy and foreign exchange risk management [1] Exchange Rate Dynamics - The research indicates an asymmetric relationship in the exchange rate linkage, where the correlation strengthens during periods of won depreciation and weakens during won appreciation [2] - Factors contributing to this imbalance include joint depreciation against the U.S. dollar and competition in export markets between China and South Korea [2] - On the day of the report, the won appreciated over 1% against the U.S. dollar, while the offshore yuan saw a slight increase of 0.15% [2]

Global Macro Overview - The report discusses the recent appreciation of Asian currencies against the backdrop of a weakening US dollar, highlighting significant increases in currencies such as the Korean won, Singapore dollar, Malaysian ringgit, and Thai baht during the "May Day" holiday period [2][3]. Currency Movements in Asia - The reversal of carry trade positions has contributed to the recent currency movements, as the pressure from Trump's "reciprocal tariff" policy has eased, leading to a rebound in Asian currencies and triggering short-covering by market participants [3][4]. - Increased demand for risk hedging has emerged, as major Asian economies have accumulated substantial US dollar reserves, primarily invested in US Treasury securities. The recent rise in credit risk associated with dollar assets has prompted institutions to enhance their hedging operations, accelerating the appreciation of local currencies [4][5]. Implications of Currency Appreciation - The rapid appreciation of Asian currencies poses dual challenges for export-oriented economies. While it mitigates the risk of capital outflows, it may exacerbate trade challenges due to increased export costs. Additionally, the appreciation impacts the net value of dollar-denominated overseas assets, particularly for financial institutions with a "local currency liability, dollar asset" structure, potentially affecting their capital adequacy ratios [5][6]. Hong Kong Dollar Liquidity - The Hong Kong Monetary Authority (HKMA) has intervened to stabilize the currency by purchasing USD 6 billion on May 2, 2025, in response to the strengthening of the Hong Kong dollar. The overall liquidity remains relatively robust, with expectations of manageable liquidity pressures in the short term [8][9]. Future Outlook - The report anticipates a gradual improvement in the liquidity situation for the Hong Kong dollar, driven by a potential slowdown in the inflow of southbound capital and the possibility of the Federal Reserve implementing interest rate cuts in the near term, which could alleviate global dollar liquidity pressures [9].