The Global Economic and Market Research Department of Dah Sing Bank published the outlook report for the third quarter of 2024, indicating that although the market's expectations for a rate cut by the US Federal Reserve have been fluctuating, there has been no significant change in the US dollar against major currencies as of the second quarter. Overall, the bank reiterated its view that the US dollar will weaken again in the third quarter of this year before the expected rate cuts by the Fed in September and December. In addition, the report stated that Hong Kong's GDP growth in the first quarter far exceeded expectations, with a year-on-year growth of 2.7% and a seasonally adjusted quarter-on-quarter growth of 2.3%. The robust overall growth data was mainly driven by exports of goods and services. Due to the improvement in GDP growth in the first quarter, the bank raised its forecast for full-year growth from 2.5% to 2.9%. According to historical trends, when the US Federal Reserve begins to implement rate cuts later this year, the interest rate differential between Hong Kong and the US may turn in favor of the Hong Kong dollar. Expected rate cut by the Fed in September The report stated that as the Fed begins its rate cut cycle, the US dollar is expected to gradually weaken, with major currencies appreciating against the dollar by the end of the year. Therefore, the bank predicts that the euro, pound, yen, and Australian dollar will be at 1.12, 1.32, 149, and 0.69 respectively in the fourth quarter of this year. The main risk of the US dollar remaining strong in the future lies in the possibility that the Fed will maintain interest rates in 2024, which could prevent further decline in US inflation. With other major central banks such as the ECB and the Bank of England likely to start rate cuts in the second half of the year, the US dollar is likely to remain strong by the end of 2024. Although most Asian currencies continue to be affected by the Fed's long-term interest rate hike rhetoric, measures taken by the Chinese authorities to stabilize the economy are expected to limit the downside risks for the Renminbi and prevent the decline from spreading to other currencies in the region. Some Asian central banks are also taking action to moderate market volatility. The report also noted that Hong Kong's banking system's total deposits have stabilized at around HK$45 billion, the lowest since 2008, mainly due to the tightening of interbank market liquidity with rising interest rates. However, the HK dollar interbank rate has fallen from its peak at the end of 2023, and the pace of funds flowing into the Hong Kong stock market has accelerated in the past two months, leading to a further decline in the HK dollar interbank rate. According to historical trends, when the US Federal Reserve starts to implement rate cuts later this year, the interest rate differential between Hong Kong and the US may turn in favor of the Hong Kong dollar. In the second quarter of this year, the US dollar against the Hong Kong dollar fluctuated between 7.80 and 7.84, largely reflecting the trend of the spread between the overnight funding rate and the HK dollar interbank rate. The current spread is a premium (meaning US rates are higher than HK rates), but as the market expects the Fed to start a rate cut cycle in September, the spread will turn to a discount, making the US dollar against the HK dollar carry trade gradually less attractive, and the US dollar against the HK dollar may return to the mid-range of 7.75 to 7.85. Overall, the bank updated its forecast for the US dollar against the HK dollar to be 7.80 for the next four quarters from the third quarter of 2024. Lee Kwok-Kit, Head of Global Finance for Greater China at Dah Sing Bank, said: After the weakening of Asian currencies in the first half of 2024, they are expected to recover slightly in the second half of the year. Firstly, as the Fed starts a rate cut cycle in September, the US dollar is expected to gradually lose its interest rate advantage and weaken again. Secondly, the outlook for the mainland economy is expected to improve in the second half of this year, which is expected to support the Renminbi exchange rate and drive a overall recovery in Asian currencies. Therefore, the forecast for the US dollar against the Renminbi, Thai Baht, Vietnamese Dong, Malaysian Ringgit, Indonesian Rupiah, and Singapore Dollar in the fourth quarter of this year are 7.13, 35.8, 25,000, 4.60, 15,800, and 1.33 respectively. The main risk of a Asian currency rebound is the sudden unexpected devaluation of the Renminbi. If the People's Bank of China raises the central parity rate of the Renminbi in the onshore foreign exchange market from the current 7.11 to 7.15, the US dollar against the Renminbi may return to more than 7.30 as high as it was last year, triggering a new round of depreciation of Asian currencies. Raise Hong Kong's GDP growth forecast for this year to 2.9% The report pointed out that Hong Kong's GDP growth in the first quarter far exceeded expectations, with a year-on-year growth of 2.7% and a seasonally adjusted quarter-on-quarter growth of 2.3%. The robust overall growth data was mainly driven by exports of goods and services. Due to the low base effect from the same period last year and the sharp rise in exports to mainland China, the volume of goods shipped abroad increased for two consecutive quarters, while the number of inbound tourists rebounded, leading to a continued strong recovery in service exports. At the same time, both goods and service imports also increased, with the latter being driven by outbound tourism demand. The bank stated that after the Hong Kong government lifted all residential property demand management measures in February, the property market in Hong Kong appeared to stabilize, but it is expected that the private residential completion volume for the 2024-25 fiscal year will surge, which may limit the price increases. Private residential prices rose by 1.1% in March but remained 1.8% lower than the end of 2023. Due to factors such as the outflow of expatriates, property prices in Hong Kong have fallen by 23% from their peak in September 2021. With the financial environment turning more accommodative in the second half of this year, it would be favorable for property prices to stabilize, but the continuing shrinking of the real estate industry and geopolitical risks, including uncertainties brought by the US presidential election, will pose resistance to property prices. Lee Kwok-Kit said: With improved GDP growth in the first quarter of this year, Hong Kong's full-year growth rate is expected to be in the middle of the government's forecast range of 2.5% to 3.5%, and the bank has raised its full-year growth forecast from 2.5% to 2.9%. Although the stabilization of the mainland economy and the measures to support the property and tourism industries by the SAR government are favorable for domestic demand prospects, close monitoring of various risks is still necessary, such as the potential impact of trade tariffs imposed by the United States and the European Union on export prospects. Economic growth is expected to slow to 2.3% in the second quarter of this year, followed by a rebound to 3.3% in the second half of the year.