The latest released U.S. non-farm employment data has eased the nerves of traders.

The data, which has been the most closely watched recently, showed that the U.S. added 206,000 non-farm jobs in June, slightly above the market expectation of 190,000, while the unemployment rate rose from 4.0% to 4.1%, higher than the market expectation of 4.0%.

After the data release, gold and U.S. stocks rose, U.S. Treasury yields fell, and the CME FedWatch Tool indicated that the probability of a rate cut in September rose above 70%. The U.S. dollar index fell back to 104.5, having previously surged towards 107 in the past two weeks.

The Japanese yen and the Chinese yuan, which had fallen significantly in the past two weeks, rebounded accordingly. The dollar/yen moved back from 162 on the 4th to near 160, while the dollar/CNH (offshore renminbi) once touched 7.3115 on the 4th and also returned to 7.2888 on the 5th.

Liu Yang, a foreign exchange expert and General Manager of the Financial Market Business Department of Zhejiang Zhongtuo Group, said to the reporter: "After the previous sharp rise, traders tend to sell off the U.S. dollar in the short term, thus beginning to desensitize to some data. The dollar/yen pullback is not as significant as the U.S. dollar index, and the decline of the U.S. dollar index seems more likely due to the exit of euro short positions." He believes that although there are still selling pressures, the renminbi exchange rate is expected to remain stable in the near term and it is unlikely to see a significant one-sided trend.

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Expectations for a U.S. rate cut in September continue to heat up.

Over the past month, the U.S. dollar has continued to climb, putting significant pressure on Asian currencies. In June, the uncertainty of the European elections had previously led to a "short squeeze" in the dollar, pushing the U.S. dollar index towards 107.

However, with the recent decrease in European uncertainty, coupled with signs of cooling inflation and employment in the U.S., expectations for a Fed rate cut in September have solidified.

Although the June U.S. non-farm data was not bad, with more job growth than expected, it was a stark contrast to the May non-farm employment data, which was nearly 100,000 more than expected (at the time, the market was worried about a possible rate hike within the year), and the overall survey results were weaker than expected. The average job growth over three months fell significantly, from an increase of 249,000 previously reported to an increase of 177,000. In addition, the industry composition of job growth in June was weaker, with the healthcare sector (+82,000) and government sector (+70,000) accounting for three-quarters of the job growth, while employment in several cyclical industries declined: retail employment decreased by 9,000, manufacturing employment decreased by 8,000, and temporary help services employment decreased significantly by 49,000.

The data also showed that the unemployment rate in June rose by 0.1 percentage points to 4.1%, and the labor force participation rate increased by 0.1 percentage points to 62.6%; wage growth pressure also began to decline, with average hourly earnings increasing by 0.3% month-on-month in June, in line with expectations, the previous value being 0.3%.Goldman Sachs said after the data release: "We continue to expect the FOMC (Federal Open Market Committee) to cut interest rates for the first time in September, followed by quarterly rate cuts, ultimately reaching a terminal rate of 3.25% to 3.5%." Currently, the federal funds rate range is between 5.25% and 5.5%.

Pictet Wealth Management's Chief Strategist and Head of Research for Asia, Chen Dong, recently told reporters: "In the second half of the year, due to weakening consumer spending and the labor market, we expect the US economic growth rate to slow down. Based on inflation data (including a slowdown in wage growth), our core forecast scenario is that the Federal Reserve will cut interest rates for the first time in September and for the second time in December, each by 25 basis points (bps). The European economy (including Germany) appears to be recovering moderately, prompting us to raise our full-year GDP forecast for the eurozone from 0.6% to 0.8%. We believe that the European Central Bank will implement three interest rate cuts this year, starting in June (one cut has already been made in June), each by 25 bps."

"The end of the strong dollar cycle" remains to be seen.

Nevertheless, it is still difficult to determine whether the strong dollar cycle has come to an end, especially as the market is about to enter the second half of the year with the US elections approaching, and uncertainty is on the rise.

Standard Chartered's Global Chief Strategist, Eric Robertsen, told reporters that recent election events have shown that politics is more important than other matters and is driving market volatility to continue to rise, especially in the foreign exchange market.

"The dollar has gained additional support from rising real yields and strong financial market performance, with the S&P 500 index outperforming the MSCI Emerging Index by nearly 10 percentage points since the beginning of the year. The excellent performance of the stock market may reverse due to election-related uncertainties, so the dollar may face a real test in November. Before the US presidential election in November, the related volatility brought by global elections may support the dollar to strengthen. In other words, a moderate election outcome will be seen as neutral or positive for non-dollar currencies and is considered to reduce volatility, while an unexpected election result may trigger capital flight to high-quality dollar assets," he said.

Additionally, although US inflation and economic data have begun to show signs of weakness, the recent inventory cycle is on the rise, indicating a strengthening manufacturing sector.

Chen Dong told reporters that there are more and more signs that the manufacturing industry in developed economies is warming up. The driving factors behind this seem to be related to the inventory cycle. Since the COVID-19 pandemic caused large-scale disruptions to supply chains, corporate inventories have declined, but it now appears that companies in developed economies are overly cautious in building up inventories to meet future demand. "Therefore, we may experience an inventory-led recovery - this could lead to an extended manufacturing cycle without jeopardizing the ongoing disinflation process," Chen Dong said.

Liu Yang told reporters that if the US dollar index can stabilize near the support level before and after the release of the US CPI data next week, it is not ruled out that it may rebound from the 104 level.

RMB and yen exchange rates rebound.Following the release of the non-farm data, the Chinese yuan and the Japanese yen have both rebounded. Currently, institutions still hold a pessimistic view on the yen's exchange rate. On July 4th, the yen fell to a new low of 162 against the US dollar, and there has been no intervention from Japanese authorities in the foreign exchange market.

It is anticipated that in the short term, it will be difficult for Japanese authorities to intervene. Matt Weller, Global Head of Research at Gain Capital Group, told reporters that at the end of July, Japan's top foreign exchange official, Masato Kanda, will be replaced by Jun Mimura, the Director-General of the International Bureau of the Ministry of Finance. Additionally, October is a period of observation for the Bank of Japan to raise interest rates again, and before that, the market is still inclined to short the yen.

"Kanda has directly intervened in the foreign exchange market several times in the fourth quarter of 2022 and in April and May of this year, supporting the yen by buying yen and selling dollars, spending $62 billion, but with little effect. Traders speculate that Kanda has now officially become a 'lame duck' policymaker, and as his term is about to end, he is unlikely to intervene again. With the interest rate differential between the US benchmark rate and Japan's target rate still exceeding 5%, the bullish trend for the US dollar/yen may continue, and some traders see the 165 level as the next potential area of interest, reaching which could force the Ministry of Finance and the central bank to re-enter the market."

As for the Chinese yuan, it is expected that the exchange rate will remain stable in the short term. Lian Ping, Dean and Chief Economist of the Guangkai Chief Industrial Research Institute, told Yicai that China's current account surplus remains stable, which will provide strong support for the yuan's exchange rate. Under this background, if the Federal Reserve starts to cut interest rates, the yuan exchange rate is expected to strengthen, and it is anticipated that the second half of the third quarter may see a stable and rising trend, although the exchange rate fluctuation may increase in the first half of the third quarter.

Recently, although the central parity rate of the yuan against the US dollar has broken through 7.12, the parity rate is still nearly 1000 points stronger than the spot transaction price, approaching the upper limit of the 2% fluctuation range, reflecting the signal of the People's Bank of China to stabilize the exchange rate.

Lian Ping suggests that from the second half of this year to next year, the central bank can moderately widen the two-way fluctuation range of the exchange rate. Based on the economic situation at different stages, reasonable choices should be made among the goals of economic growth, full employment, price stability, and balance of international payments to resist and buffer the impact of external factors, thereby improving the efficiency of demand management policies and the control ability of money supply.

Lian Ping believes that the probability of a reserve requirement ratio (RRR) cut this year is greater than that of an interest rate cut, but both are possible. He expects that the central bank may slightly adjust the 7-day reverse repurchase operation rate by 10 basis points to play the guiding role of the main policy rate, and does not rule out the possibility of the LPR (Loan Prime Rate) being reduced by 10 to 15 basis points even if the MLF (Medium-term Lending Facility) rate remains unchanged. A second RRR cut in the year may occur in the early third quarter. Currently, the weighted average reserve requirement ratios for large, medium, and small banks are 8.5%, 6.5%, and 5.0%, respectively, and there is still some room for adjustment for large and medium-sized banks. Considering that the relevant banking institutions account for 60% of the deposits in China's banking industry, if a targeted RRR cut of 0.5 percentage points is implemented, it is estimated that more than 600 billion yuan of liquidity can be released to the market.