The United States will continue solid growth, but a rate cut is certain. Will President Trump pursue a dollar-depreciation policy [from Tetsu Emori's newsletter]
From the investment newsletter “Tetsu Emori's Real Trading Strategy” by Tetsu Emori, provided by GogoJungle, here is a small portion from this morning's dispatch.
〔CURRENCY MARKET〕
USD/JPY rose. Following the release of the U.S. GDP statistics, yen selling and dollar buying gained a bit of strength, trading in the high 108s. The preliminary real GDP growth for Q2 2019 was an annualized 2.1% higher than the previous quarter. Investment slowed due to the impact of U.S.-China trade tensions, and the pace of growth slowed sharply from a 3.1% increase in the previous quarter. However, since market expectations were for a 1.8% rise, the drop was not steep, and the growth was viewed as steady, leading to a modest yen weakening and dollar strength. Meanwhile, the GDP data continued to show inflation remained subdued, fueling speculation that the FOMC would cut rates by 0.25% at its meetings on the 30th and 31st. With the expectation of a large rate cut retreating, U.S. long-term interest rates rose, pushing the yen lower, with a brief move up to 108.80 per dollar.
EUR/USD remained in the low-1.11s. GBP/USD fell. Following comments by Jean-Claude Juncker, President of the European Commission, that former UK Prime Minister May's Brexit agreement with the EU was the best and only proposal, the GBP/USD fell to a 27-month low.The CFTC reported that as of the 23rd, the IMM currency futures market showed yen futures net shorts at 9,377 contracts, down from 10,380 the previous week. Longs increased by 17,37 contracts to 33,642, while shorts decreased by 266 to 44,019. Euro futures net shorts stood at 30,004, up from 31,351 the prior week. GBP futures net shorts at 78,583, up from 76,357. AUD futures net shorts at 47,980, down from 52,576.
Kudlow, Chairman of the White House NEC, stated, “Last week the Trump administration discussed exchange-rate policy and ruled out intervening in the currency market to push the dollar lower to support exports.” It is unusual for a senior official to reveal internal discussions on exchange rates. This appears to quell market speculation of prompt dollar weakness. Navarro, a White House adviser, told a meeting on the 23rd that he proposed currency intervention to push the dollar lower to apply more pressure on China, but President Trump reportedly rejected it. However, on the 26th, Trump said, “I didn’t say I wouldn’t do anything about the dollar,” while avoiding a direct stance that a stronger dollar is not desirable, noting that “a stronger dollar can be wonderful in one sense, but it makes trade more challenging.”
President Trump has criticized Europe and China for guiding currency weakness via monetary easing and has called on the Federal Reserve to enact monetary easing as a countermeasure. On this day, the market also complained about the yuan being “very weak.” Some market observers think the Trump administration may tie trade policy to a dollar-denomination strategy. Still, Treasury Secretary Mnuchin emphasized believing in a strong dollar in the long run, and Kudlow likewise suggested that a stable, trusted dollar remains attractive to global capital, denying wild speculation.Russia’s central bank cut the policy rate from 7.50% to 7.25%. With prices cooling, there is an expectation of further rate cuts within the year. This is the second cut this year, returning the policy rate to September of last year’s level. Inflation in Russia had been in double digits a few years ago but had slowed to 4.6% as of July 22nd. It is approaching the target of 4%, providing room for further easing. The central bank stated that “short-term inflation risks are limited given the slowdown in economic activity and one-off factors,” and that if the economy unfolds as expected, further rate cuts could be decided at upcoming policy meetings. The next policy decision is scheduled for September 6, followed by a press conference with Governor Nabiullina.
【Currency Trading Strategy】
We will stay on the sidelines on USD/JPY. The upper bound of the target range at 108.50 is being maintained. The mood suggests a continued upward trend, but we first want to wait for the FOMC results and market reaction. Given the short-term overbought signals, we are reluctant to buy higher. If, due to the FOMC, the market closes above the 108.98 high on a daily basis, we may need to reassess. Until then, we remain cautious. If it breaks below 108.50, it could be easier to consider shorts. Yen futures positions are nearly flat and not skewed; either side could move, so following the prevailing momentum is prudent.
European currencies like the euro and pound remain soft. The AUD is also starting to phase lower. In other words, dollar repurchases are strengthening again. These currencies are technically oversold and could attempt a rebound. Therefore, we will assess after the FOMC whether to buy back. There is a genuine possibility of a sharp rebound, so stay vigilant. While the market reacts as if the Trump administration denied a dollar-weakening policy, remember that the United States’ underlying aim is to foster a weaker dollar to facilitate global use of it. The cheaper the dollar, the more usable it is.
As for the FOMC, a 0.25 percentage point rate cut is already priced in at 100%. A 0.50% cut is unlikely. Powell’s press conference may hint at potential future cuts, but he will likely not commit. He may be perceived as hawkish, much like Draghi's stance at the ECB. Yet, in the end, the risk of dollar appreciation will eventually surface, with stock weakness acting as a trigger.
As repeatedly noted, August has a very high probability of Japanese stocks falling. If that happens, the safe-haven yen is likely to be bought. The previously extremely low volatility is expected to rise sharply as August begins. August could be the second major hurdle this year, following May’s intense stock sell-off. The next one is August, followed by a final test in November. By then, U.S. stock market risk is also expected to be elevated. Be mindful of risk asset sell-offs. If the dollar strengthens further, the yen could drop to as low as 96 by year-end.
We will adjust the currency-pair trading strategy. Since emerging market currencies are highly volatile, they will be removed. We will focus on major currency pairs. The targets are the Yen, Euro, Pound, AUD, NZD, and CAD. Right now, the Canadian dollar and the New Zealand dollar are the strongest currencies.
USD/JPY: None
EUR/USD: Short
GBP/USD: Short
AUD/USD: Long
NZD/USD: NoneUSD/CAD: Long
EUR/JPY: Short
GBP/JPY: Short
AUD/JPY: Close long and open short
NZD/JPY: None
CAD/JPY: NoneEUR/GBP: Short
EUR/AUD: None
GBP/AUD: NoneEUR/NZD: Short
GBP/NZD: ShortEUR/CAD: Short
GBP/CAD: None
AUD/CAD: Long closed
NZD/CAD: Long closed
“Tetsu Emori's Real Trading Strategy” (Tetsu Emori)quote.
In August, Mr. Emori says, the probability of declines in Japanese stocks is extremely high, which tends to boost demand for the yen. This week’s FOMC will be held on the 30th and 31st, but the rate cut already appears priced in. While a surprise move seems unlikely, let’s watch the market trend after the FOMC. (editors)(Edited by the Editorial Department)
