June 20, 2019 08:30: Currency Trading Strategy [From Mr. Tetsu Emori's Mail Magazine]
From the投資 newsletter "Jōori Tetsu's Real Trading Strategy" by Tetsu Emori, provided by GogoJungle, here is a small excerpt from this morning's distribution.
〔CURRENCY MARKET〕 The dollar/yen fell. With the Fed considering rate cuts within the year, yen buying and dollar selling progressed, pushing the USD/JPY to the low-108s. In the FOMC statement, the wording about watching the economy "patiently" was removed. Noting growing uncertainty about the outlook of the U.S.-China trade war and deceleration of inflation, it stated, "They will act appropriately to sustain economic expansion," and suggested the possibility of rate cuts within the year. It also became clear that the number of FOMC participants who foresee at least one rate cut this year rose sharply from 0 to 8 in the Fed's projection of economic and interest-rate paths from the 17 participants. In response, expectations for year-end rate cuts rose further, and while long-term rates fell and the dollar weakened, USD/JPY briefly entered the 107 range. However, the market had already largely priced in a tilt toward rate cuts by the Fed, so the dollar did not drop dramatically. Still, the dollar weakened against the euro and the pound. Meanwhile, May's UK CPI rose 2.0% year over year. With the easing of airfares and other factors, inflation slightly slowed from 2.1% in the previous month.
【Currency Trading Strategy】 We will short USD/JPY new positions. Although at quite a low level, the rally is slow, so we will short for now to see how it plays out. It will be difficult for the upside unless it stays above 108.60. If Japanese stocks rise, there will be some yen weakness, but the Bank of Japan's policy has its limits, and stopping a yen appreciation won't be easy. Whether stocks can be supported by a stronger yen remains uncertain, but for hedging purposes, I would like to keep USD/JPY as a short. The party leaders debate was completely disappointing. It would be better not to have high expectations. However, there is still a possibility of the Lower House dissolution. I will keep a close eye on the movements of the past few days.
The FOMC was as expected. It seems Chair Powell did not fail in the press conference. Previously, the press conference showed little understanding of the market and was terrible, but now the stock price at the time of the press conference stopped dropping, and it could be said that the prior nightmare may have been dispelled. Interest in the Fed's policy will likely remain high. The probability of a rate cut in July is 100%, but we will pay attention to how this fluctuates. If stock prices rise and the probability of a rate cut falls, that could lead to a sharp drop in August. I think July will be quite reassuring, but caution is still required.
As reiterated, future material will be influenced by Japan's political situation and the G20 summit. In particular, we will watch for the possibility of a deal in the U.S.-China summit. So far, everything has followed the scenario. If there is a surface, shock agreement in the U.S.-China summit, stock prices and yen could rise rapidly. Currently there is no such expectation, so unexpected events could occur. If this combines with the dissolution of the House and a double election for both houses, it would be a big deal. The market, not foreseeing it, could lead to further stock gains and yen weakness. Until the end of the month, we cannot take our eyes off diplomatic and domestic developments. It seems like a historic move. However, even if the optimistic scenario plays out, the shelf life is only until July, and August is seen as a dangerous month this year.
In the IMM currency futures market, long USD against G10 currencies decreased to $32.114 billion, still high. This means there remains substantial room for selling the dollar. Conversely, the dollar is short against emerging market currencies by $3.269 billion, a slight reduction but still a dollar short against EM currencies. This unwinding is expected to come in the future. If so, we must consider the risk of capital outflow from emerging markets. This would lead to a risk-off environment. Ultimately, cross-yen tends to fall, i.e., yen strengthens. As expectations for lower dollar rates grow and the unwinding of dollar longs proceeds, yen strength becomes more likely. While a continued stock uptrend makes this movement less likely, I think the yen could strengthen sharply around August.
I will maintain a short position on the euro/yen.
I will maintain a short position on the euro/dollar.I will maintain a long position on the euro/sterling.
I will maintain a short position on the pound/yen.
I will maintain a short position on the pound/dollar.I will maintain a short position on the AUD/yen.
I will maintain a short position on the AUD/USD.I will maintain a long position on the USD/ZAR.
I will maintain a short position on the USD/ZAR.I will newly long the USD/TRY.
I will newly short the USD/TRY.I will maintain a short position on the NZD/USD.
I will close the USD/CAD long and take a new short position.
I will maintain a short position on the USD/MXN.Emerging market currencies are highly volatile, so keep position sizes below one-quarter of major currencies. Also, there is no need to take on positions recklessly.
Excerpt from “Jōori Tetsu's Real Trading Strategy” (Tetsu Emori).
The expectation for rate cuts within the year increased at the FOMC, but there was no major movement since it was already priced in by the market. Several important economic indicators are scheduled for today, so be sure to check them frequently. (Editorial staff)
