America's rate cut has already been priced in. Next, all eyes are on whether the ECB will embark on rate cuts.
From the real trading newsletter “Tetsu Emori’s Real Trading Strategy” by Emori Tetsu, provided by GogoJungle, here is a small excerpt from this morning’s delivery.
〔CURRENCY MARKET〕
USD/JPY moved little. With upcoming financial policy meetings in Japan, the U.S., and Europe, a cautious mood spread, and it hovered in the 108 yen area with slight movement. The flash July euro-area composite PMI declined from the previous month and missed market expectations. In response, there was a dominant trend of buying the safe-haven yen and selling the dollar. Additionally, the dollar was slightly retraced as U.S. June new home sales rose for the first time in three months.
Meanwhile, in the FX market, the testimony of former special counsel Robert Mueller, who investigated Russia’s interference in the U.S. presidential election, at a House Judiciary Committee hearing did not completely clear President Trump, but it did not become a major market driver. With the ECB governing council meeting on the 25th and the BOJ policy meeting and the FOMC scheduled for next week, investors remained cautious, resulting in trading within a narrow range.
EUR/USD hovered in the low-1.11s, hitting a two-month low on weak eurozone data. GBP/USD traded in the high-1.24s, bouncing back above last week’s two-year and three-month low of 1.2382. It also rose against the euro.
British Prime Minister Boris Johnson, the leader of the governing Conservative Party, took office as the new Prime Minister. He stated that he would secure a “new and better” Brexit deal with the EU and fulfill the commitment to leave the EU by October 31. In response, the pound rose as it extended its gains.
Treasury Secretary Steven Mnuchin said he does not intend to support short-term dollar weakness and that a strong and stable dollar serves U.S. interests in the long run. He also noted that the dollar as the world’s reserve currency benefits the United States. The IMF, on the other hand, last week suggested that the dollar is overvalued by 6–12% based on short-term fundamentals. President Trump on the 22nd criticized, saying that “foreign exchange manipulation by other countries is very unfair” and that “the Fed’s policy is driving a stronger dollar.”
【Currency Trade Strategy】
We will stay sidelined on USD/JPY. It seems the market will lack a clear direction ahead of the FOMC. With a blackout period during which Fed officials cannot speak, momentum is likely to remain subdued until the FOMC. Market participants will be awaiting policy developments in Japan, the U.S., and Europe. First, the ECB meeting on the 25th is important; if it signals a future rate cut, the euro could come under further downward pressure. The pound has seen short-covering as Johnson took office, making euro selling more likely. The impact on USD/JPY is currently modest, but if euro weakness continues, euro/yen selling could spill over into USD/JPY, so close watch is necessary.
As for the FOMC, a 0.25 percentage point rate cut is fully priced in. A 0.50 point cut is only priced in about 22.5%, so a 0.25 point move seems likely this time. More attention should be paid to the ECB’s stance; a clearer easing bias could accelerate euro weakness. On the other hand, the BOE has suggested potential rate cuts as well, so attention will focus on which way relative power moves. Given that the pound had been heavily shorted, a rebound in the pound is possible. There may also be additional buybacks in GBP/JPY. For now, we want to see how prices move.
On USD/JPY, 108.50 seems to act as a ceiling. If price moves above this level, the trend would turn higher, but returning to this level could imply oversold conditions and increase selling pressure. It might be time to sell. Conversely, breaking below 107.50 would make selling easier. We are watching whether the FOMC results trigger a move below 107.50.
As repeatedly noted, August historically shows higher risks of Japanese stock weakness and yen appreciation, based on past data. In other words, the safe-haven yen tends to be bought more readily. The extremely low volatility seen so far is likely to rise sharply in August. We view August as this year’s second major test. It is prudent to monitor risk asset selloffs. If a clear yen-strength trend emerges, there could be downside risk toward 96 yen by year-end. We will change the investment strategy for currency pairs. Because emerging market currencies are highly volatile, we will exclude them. We will primarily trade major currency pairs. The focus will be on the yen, euro, pound, AUD, NZD, and CAD. Right now, the Canadian dollar and NZD are the strongest currencies.
USD/JPY: None
EUR/USD: Short
GBP/USD: Short
AUD/USD: Long
NZD/USD: Long
USD/CAD: Close out ShortEUR/JPY: Short
GBP/JPY: Short
AUD/JPY: Long
NZD/JPY: None
CAD/JPY: NoneEUR/GBP: None
EUR/AUD: Short
GBP/AUD: NoneEUR/NZD: Short
GBP/NZD: ShortEUR/CAD: Short
GBP/CAD: None
AUD/CAD: Long
NZD/CAD: Long
“Tetsu Emori’s Real Trading Strategy” (Emori Tetsu)quote.
In the United States, rate cuts have already been priced in, and the focus now is how much to cut. In Europe, attention is likely to center on the downturn in PMI indicating economic weakness and on the new British Prime Minister Boris Johnson’s moves. First, let us closely monitor the FOMC next week. (Editorial staff)
