Market outlook for the week of October 21 ~ YEN-Kura's Real Top Trading

【Market View】

Last week the risk-on flow continued with a weaker yen and higher stock prices. The Chinese Ministry of Commerce said it is progressing the drafting of the Phase 1 agreement and has begun talks on Phase 2. Also, the developments around Britain's Brexit, which had been the week's most notable issue, were good news for the markets and provided support.

As expectations for a UK-EU agreement grew, negotiations continued, and when EU approval for the UK proposal was obtained on the 17th, the pound rose.

Following the U.S.-China agreement, Brexit was expected to be agreed and to exit on October 31, leading to pound-led dollar selling, but risk-on sentiment led to yen selling, keeping the yen weak through the week.

However, on the 19th there was a dramatic reversal in the UK Parliament. For the first time in 37 years, Saturday debates were held, and the withdrawal agreement that Prime Minister Johnson and the EU had agreed upon was to be put to a vote.

Speaker of the House John Bercow decided to consider the proposal from former Conservative Oliver Letwin among various amendments to the agreement.

This bill would suspend the House's approval of the withdrawal agreement until various withdrawal-related bills are enacted. Since it is unlikely that all related bills will pass by October 31, the Prime Minister would have to request an extension of the Brexit deadline from the EU. This amended bill passed by a vote of 322 to 306.

In response to the vote, Prime Minister Johnson stated that he does not intend to negotiate a Brexit extension with the EU and emphasized that he would ensure Brexit on the 31st as demanded by the Brexit-supporting faction. The government said it would submit the Withdrawal Agreement Bill (there were reports of the 22nd).

Labour Party leader Corbyn said the Prime Minister is ignoring the law and threatening Parliament, while Ian Blackford, the SNP's Westminster leader, warned that if a Brexit extension is not requested he could be hauled into court.

At the time of the amendment's passage, it was not clear what Johnson would do, but afterward he sent a copy of the letter under the Brexit-extension law to the EU without signing it. In a separate letter, he signed and sent one indicating he did not want to delay Brexit. Tim Barrow, the UK ambassador to the EU, explained in another letter that the letter requesting an extension was sent simply to comply with the law.

EU Council President Donald Tusk said he had received the extension request but did not go into details.

On Monday, selling of the pound and risk-off moves are expected. Johnson has applied for a Brexit extension to the EU as prescribed by the bill (though there is no guarantee the EU will accept it, and the EU is unlikely to trigger a no-deal Brexit). If this is carried out properly, the path to an orderly withdrawal could continue, suggesting limited further downside for the pound. However, if Johnson resorts to a ploy to block the extension, the pound could fall sharply, potentially triggering risk-off and a stock sell-off driven by a stronger yen-led move in USD/JPY.

This week on the 24th there will be Turkey’s central bank policy rate and the ECB policy rate announcements. The ECB is expected to stay on hold, possibly with a ceremony-like feel for Draghi’s departure. With the FOMC blackout period ahead and no official statements, attention will be on US durable goods orders and new home sales data on the 24th.

We expect this week to test how far the risk-on mode from last week will break down.

【USD/JPY Catalysts and Forecast】

Last week USD/JPY opened at 108.43 and closed at 108.41, down 0.02%. The weekly range was 91 pips, a narrow week with little volatility. On the 14th, reports suggested China wants to start talks within the month to finalize details of the first-phase agreement, with signing coming later, which weighed on the pair and pushed it down to 108.03, the week’s low.

On the 15th, reports that the UK-EU Brexit draft was nearing agreement caused a sharp rise in the pound, lifting USD/JPY around 108.90, led by the pound/yen.

On the 17th, reports of an agreement on the Brexit deal pushed the high to 108.94.

Thereafter it traded in the upper 108s and finished at 108.41.

In addition to the 14th China's reports, on the 16th the Chinese Foreign Ministry warned that in response to the US passing the Hong Kong Human Rights and Democracy Act (which requires President Trump’s signature), China would take countermeasures to defend sovereignty. Last week, US-China issues did not factor much due to Brexit, but in a risk-off scenario, US-China frictions could become a driver of yen strength, so caution is warranted.

The BoJ Tankan released on Oct 1 revised down the estimated exchange rate for large manufacturers in the manufacturing sector from 109.35 in July to 108.68. With the one-month swap rate discount around 0.25 yen, if exporters hedge through the end of March, securing 108 would imply 109.20–109.30, and securing 108.58 would imply 109.80–109.90, potentially triggering exporters’ selling. However, given that 108.50–109 was repeatedly resisted, exporter selling above 108.50 might have been present, which could have capped USD/JPY’s gains.

In IMM currency futures, long positions on the yen decreased by 6,387 contracts, shorts increased by 11,266 contracts, turning net yen shorts to 6,641 contracts.

With 109-level resistance, USD/JPY likely formed a short-term top. The short-term RSI has risen to 80%, and after the UK Parliament’s decision, further pound-led yen buying is expected.

Weekly pivot is at 108.46, the 120-day moving average at 108.10, weekly pivot support 1 at 107.98, and the 20-day moving average near 107.95; around 108 should be the first support level.

The Ichimoku conversion line sits at 107.85, the baseline at 107.70, and weekly pivot support 2 at 107.55, making the mid-107 yen range the next target.

If this level is broken downward, weekly pivot support 3 at 107.07 and the cloud’s upper boundary at 106.90 would imply a drop toward around 107.

Conversely, if the decline is limited and the mid-107s hold as support, 109 could be tested again, aiming for the previous highs around 109.30–109.40.

…The following content is included in the main Investment Salon section

【Euro: Catalysts and Forecast】

【AUD: Catalysts and Forecast】

【Nikkei 225: Catalysts and Forecast】

【Weekly Range, Fibonacci, Pivot】