Trump's U.S. President Trump sharpens his tone toward a weaker dollar. Be aware of past data to address the risk of a stronger yen!
From the investment e-newsletter “Tetsuya Emori’s Real Trading Strategy” by Emori Tetsuya, provided by GogoJungle, here is the edition released this morning.
〔CURRENCY MARKET〕
USD/JPY fell. In July, exports rose unexpectedly in China’s trade data, prompting global stock gains led by U.S. equities and a retreat in investors’ risk-off posture, which saw the yen—traditionally a safe asset—weaken in some instances. However, when U.S. 30-year Treasuries saw weak auction results and Italian political concerns triggered a drop in U.S. long-term yields, USD/JPY slid to the upper 106 yen range. EUR/USD fell to the upper 1.11 area. Although the People’s Bank of China set the yuan’s reference rate against the dollar, for the first time since the global financial crisis, above 7 yuan per dollar, the yuan actually moved toward a stronger level against expectations, which was interpreted as a signal from authorities to curb yuan depreciation and served as a positive factor. However, offshore yuan remained above 7 per dollar.
President Trump posted on Twitter that he might be seen as liking a very strong dollar, but that is not the case, and he is pressuring the Fed to cut rates sharply again to promote dollar weakness. Historically, U.S. administrations have prioritized stabilizing the dollar and have avoided comments on exchange rates. Trump’s remarks could be interpreted as rejecting the longstanding policy that a strong dollar is in the national interest and may provoke market volatility. Trump also argues that “higher interest rates compared with other countries are making the dollar strong,” warning of a global slowdown and noting that central banks around the world are cutting rates while U.S. yields stay relatively high, putting U.S. manufacturers at a disadvantage.
Furthermore, by stating that “with aggressive rate cuts by the Fed and quantitative tightening ending, U.S. companies could be more competitive with a weaker dollar,” he is engaging in another round of jawboning to push the Fed toward substantial monetary easing. Market expectations are growing that the Fed will cut rates at the end of July and again at the September FOMC meeting. The Fed has already paused the balance-sheet contraction that provides a tightening effect. FedWatch shows a 100% probability of a 0.25 percentage point cut at the September FOMC.
[Currency Trade Strategy]
We will maintain a short position on USD/JPY. Set a stop at 106.95. If it falls below 104.80, we plan to add to the short. Trump’s persistent push for a weaker dollar is likely to push USD/JPY lower. Similar signals are appearing against European currencies as well. Since the U.S., as the issuer of the world’s reserve currency, aims for a weaker dollar, it is difficult to counteract. There are rumors of indirect intervention by the Japanese government, but excessive actions could invite a response from the U.S. In other words, extremely strong yen appreciation pressure. Of course, this will also affect Japan–U.S. trade negotiations. Do not underestimate the risk of yen appreciation.
In any case, August is a month with a very high probability of yen appreciation. It is crucial to interpret this data naïvely. It seems unlikely that the government or the Bank of Japan would have any strong cards to counter yen strength. Ultimately, U.S. stance will prevail. While the possibility of additional BOJ easing cannot be ruled out, it is unclear what could be done. Governor Kuroda could do something unexpected, but with many overseas central banks cutting rates, it may be difficult for Japan, which has already implemented ample easing, to join this rate-cutting race. In any case, for now, we should rely on historical data and respond straightforwardly.
We do not know where the USD/JPY’s downside will end. One factor to watch is this year’s dollar-yen high-low range around 96 yen, derived from the past 30 years of price movements. Whether it will reach that level is unclear, but until the trend changes, we should maintain shorts and prepare to liquidate on a rebound. August tends to be a season of stock and yen strength, but for now, unless there is extraordinary political force at play, the current trend is unlikely to reverse. It is important to understand past data as well.
To reiterate, August looks set to be this year’s second major hurdle. Since the start of the year, May, August, and November have been the year’s three “hurdles,” and May already brought a severe stock decline. Next comes August. The yen-strong and stock-weak trend is starting to appear; we will watch carefully to see if the current trend persists. The final push is anticipated in November when U.S. stock risks are thought to rise. Be mindful of the potential for asset sales. If yen strength becomes pronounced, there could be a drop to as low as 96 yen by year-end.
We will change the currency pairs we target for investment strategy.Emerging-market currencies are volatile, so we will exclude them. We will focus on major currency pairs. The currencies to target are the yen, the euro, the pound, the Australian dollar, the New Zealand dollar, and the Canadian dollar.
Right now, the Canadian dollar and the New Zealand dollar are the strongest currencies.USD/JPY: Short
EUR/USD: None
GBP/USD: Short
AUD/USD: Short unwound
NZD/USD: ShortUSD/CAD: Long
EUR/JPY: None
GBP/JPY: Short
AUD/JPY: Short unwound
NZD/JPY: Short
CAD/JPY: ShortEUR/GBP: Long
EUR/AUD: Long unwound
GBP/AUD: Long unwound
EUR/NZD: Long unwound
GBP/NZD: Long unwoundEUR/CAD: Long
GBP/CAD: Short
AUD/CAD: Short unwound
NZD/CAD: Short
“Tetsuya Emori’s Real Trading Strategy” (Emori Tetsuya)quoted.
Amid President Trump’s strong dollar-weakness pressure, Fed Watch sees a high likelihood of a rate cut at the September FOMC. On the other hand, Japan has almost no effective countermeasures against yen strength, so understanding past data and responding accordingly is important. (Editorial staff)
