The U.S. economy remains resilient, and concerns about a slowdown in Europe are strengthening euro selling and dollar buying [from Tetsuji Emori's newsletter]
From the investment e-newsletter “Tetsu Emori's Real Trading Strategy” by GogoJungle, here is a small excerpt from this morning's distribution.
〔CURRENCY MARKET〕
USD/JPY rose. Supported by solid US retail sales, there was a bout of selling yen and buying dollars, lifting the pair to the lower-108 yen range. June US retail sales rose 0.4% from the previous month. The gain was 4 months in a row. Excluding the highly volatile motor vehicles and parts dealers, it rose 0.4%. Market expectations were a overall 0.1% increase, and 0.1% excluding motor vehicles and parts, both beating forecasts. In response, excessive concern about the US economy diminished, US long-term rates rose, and yen selling/dollar buying intensified.
Additionally, Germany’s ZEW economic sentiment index for July fell 3.4 points from June to minus 24.5, marking a third consecutive deterioration. With concerns about economic slowdown in the euro area, there was stronger euro selling and dollar buying, which spilled into dollar buying against yen. EUR/USD traded in the low 1.12s.Pound against dollar temporarily fell below 1.24 for the first time since April 2017. Boris Johnson and Foreign Secretary Jeremy Hunt, who are competing for the UK prime ministership, indicated they would not accept the safety measures on the border issue with Ireland included in Prime Minister May’s withdrawal agreement, even if deadlines are set. This heightened the risk of a no-deal Brexit, triggering selling in the pound. The decline also pushed the pound below the level reached in the January 3 algorithmic “flash crash.” The pound also weakened against the yen to the 133 yen area, approaching the 132 yen level reached on January 3.
IMF Managing Director Christine Lagarde, designated to be ECB president, announced she will resign as of September 12. The IMF will begin searching for a successor. Historically IMF leaders have been European, suggesting a high likelihood of another European in the role. Lagarde was nominated by the EU to succeed Mario Draghi as ECB chief on the 2nd of this month and subsequently stepped down from the IMF; Lippmann’s deputy chief, Deputy Secretary General, has been acting. The IMF is moving toward a quick transition to its new structure, hence the clear timing of her resignation.
Lagarde became IMF’s first female head in 2011. She was reappointed in 2016, serving until July 2021. She contributed to the post-financial crisis recovery and emphasized support focused on women and vulnerable groups. In top international finance institution appointments, the IMF has a European origin, and the World Bank is led by a US national—both reflecting a pattern of dominance by developed nations. While Lagarde’s successor will likely be European, there is persistent dissatisfaction among emerging economies about developed nations monopolizing posts.【Currency Trading Strategy】
We will maintain a long USD/JPY position. It seems likely to fall, yet it has not. The correlation with stock prices appears to be weakening. It tracks daily fluctuations in US rates, but with the July FOMC rate cut already largely priced in, it becomes harder for the market to move unless new catalysts emerge. Nevertheless, upside is considered limited, with 108.80 yen as a rough ceiling, making excessive optimism unlikely. We will continue to hold positions until below 107.50 and monitor the situation. In terms of profit opportunities, right now it might be better to focus on trading other major currencies rather than USD/JPY.
Nevertheless, if US stocks set new highs and then falter, USD/JPY is likely to be sold; in such a scenario safe-haven buying would push the yen higher across the board. In the IMM currency futures market, dollar longs remain, but yen futures are nearly neutral. It is possible to move in either direction, so watching the market and making judgments accordingly should suffice.
As reiterated, with the latter half of July approaching, August could once again become an important adjustment phase following May. There is a risk of stock price declines and yen appreciation, so stay vigilant. Since the start of the year, we have warned that “May, August, and November should be watched.” Indeed, May saw a sharp stock decline, and August—the second major correction after May—is two weeks away. Holding USD/JPY long at this point is not very prudent; if it falls below 107.50, we should cut and consider shorting.
However, that timing may come in the latter half of next week.
The current market is exhibiting too-low volatility. This in itself is a risk. The market seems overly optimistic, particularly the US stock market. Japanese stocks have also become too low in volatility. This will eventually lead to a large move. If risk-off occurs, USD/JPY declines are inevitable. As risk assets are sold, the yen would strengthen. We must not neglect preparation.If the yen strengthens clearly by year-end, the potential drop could reach as low as 96 yen.We will change the currency pairs we focus on for investment strategy. Since emerging market currencies are highly volatile, they will be excluded. We will prioritize major currency pairs.The focus currencies will be the yen, euro, pound, Australian dollar, New Zealand dollar, and Canadian dollar.Right now the Canadian dollar and the New Zealand dollar are the strongest currencies.
USD/JPY: Long
EUR/USD: None
GBP/USD: Short
AUD/USD: None
NZD/USD: Long
USD/CAD: ShortEUR/JPY: None
GBP/JPY: Short
AUD/JPY: Long
NZD/JPY: Long
CAD/JPY: LongEUR/GBP: Long
EUR/AUD: Short
GBP/AUD: ShortEUR/NZD: Short
GBP/NZD: ShortEUR/CAD: Short
GBP/CAD: Short
AUD/CAD: Short
NZD/CAD: None
“Tetsu Emori's Real Trading Strategy” (Tetsu Emori)quotation.
As August nears, a period of adjustment, be wary of stock price declines and yen appreciation, says Mr. Emori. With a lack of materials causing limited market movement, how will an incoming adjustment phase affect the overall market? (Editor)
