The market is敏感に to US rate cuts. As U.S. equities begin to adjust, the downward pressure on the USD/JPY strengthens!
From the investment e-newsletter “Real Trading Strategy by Satoshi Emori” authored by Tetsu Emori, provided by GogoJungle, here is a small excerpt from this morning’s distribution.
〔CURRENCY MARKET〕
USD/JPY fell sharply. Amid rising expectations of U.S. rate cuts, selling the dollar accelerated and it declined to the low-107s. In a speech, Federal Reserve Bank of St. Louis President Jamesbull Williams said that to address the problem of the zero lower bound, they would need to “act more quickly to ease policy.” Vice Chair Lael Brainard also told a television interview that there is no need to wait until the situation deteriorates dramatically before easing rates, suggesting the need for early rate cuts. Following dovish statements from two policymakers with voting rights at the FOMC, markets widened expectations for a large 0.50% rate cut at the end of July’s FOMC. In response, selling the dollar—which loses investment appeal as U.S. yields fall—and buying the yen accelerated. News that a U.S. Navy assault ship shot down Iranian drones in the Strait of Hormuz also heightened geopolitical risk and propelled safe-haven yen buying. EUR/USD rose to the upper 1.12s. The dollar weakened against a broad range of currencies. GBP/USD also rose, reclaiming the 1.25 level, and AUD and NZD strengthened vs USD.Meanwhile, central banks in Korea, Indonesia, and South Africa cut policy rates on the 18th. The backdrop is growing global economic uncertainty due to U.S.-China trade frictions. With late-month U.S. rate cuts anticipated, emerging markets are seen taking preemptive steps to curb rapid gains in their own currencies. Korea’s central bank lowered its key policy rate by 0.25 percentage points to 1.5%. Indonesia trimmed 0.25% to 5.75%. South Africa cut 0.25%, Ukraine 0.5%.
【Currency Trading Strategy】 We will unwind long USD/JPY. It did fall after all. The decline was due to a stock market downturn. We anticipated this outcome, and while we kept the position until the fact was confirmed, this is fine. It is crucial to conduct reproducible trades. This has begun a downward trend. However, I will watch a little longer until around 106.80 yen is breached. Today, there may be buying in Japanese stocks, which could cause a temporary rebound. However, that would likely be only a delay tactic. Ultimately the trend points to a stronger yen, so I will wait calmly for the trend to become clearer.With comments from Fed officials, the probability of a rate cut at the July-end FOMC remains at 100%. Furthermore, the probability of a 0.50% cut has risen to 49.3%. Realistically, a 0.25% cut is expected, but the market appears highly sensitive. If expectations get ahead of themselves, that would be a misjudgment. If U.S. stocks begin a substantive correction, USD/JPY could come under further downward pressure. The timing of that is extremely important, so I will monitor carefully.The recently low volatility seems likely to surge in August. There are preliminary signs of such moves. As repeated, August could be a second critical hurdle this year. Market developments in the coming weeks require more attention than ever. In risk-off scenarios, USD/JPY declines are inevitable, so be cautious of selling risk assets. If the yen strengthens clearly, there could be a drop to as low as 96 by year-end.
We will change the currency pairs we trade. Emerging-market currencies are highly volatile, so we will exclude them. We will focus on major currency pairs. The targets are: JPY, EUR, GBP, AUD, NZD, and CAD. Right now, CAD and NZD are the strongest currencies.
USD/JPY: none
EUR/USD: none
GBP/USD: short
AUD/USD: long new
NZD/USD: long
USD/CAD: shortEUR/JPY: short new
GBP/JPY: short
AUD/JPY: long
NZD/JPY: long
CAD/JPY: close out and go longEUR/GBP: long
EUR/AUD: short
GBP/AUD: shortEUR/NZD: short
GBP/NZD: shortEUR/CAD: short
GBP/CAD: short
AUD/CAD: close out short and go long
NZD/CAD: long
“Real Trading Strategy by Tetsu Emori” (Tetsu Emori)quote.
In emerging markets, rate cuts are already happening, signaling a higher-than-expected level of global economic anxiety. In the U.S., rate cuts are viewed as likely, and political risk with Iran has surfaced. It seems prudent to be cautious of yen appreciation (Editor)
