[September 6–10] Trading strategy considering Japan's political turmoil and the ECB Council

Last Week's Foreign Exchange Range (Volatility Range)

Last Week's Foreign Exchange Summary

USD/JPY

• Last week's USD/JPY started at 109.86 yen per dollar. On Monday, the dollar yen gradually declined, hitting the week's low of 109.58, but on Tuesday near month-end, dollar buying prevailed and it rose to a high of 110.42. After the ADP employment data for August on Wednesday showed weak +374,000 jobs, dollar selling dominated, and movement stabilized around 110 ahead of Friday's government employment report for August. The government employment data released on Friday was also weak at +235,000, and although dollar selling persisted into the weekend, support from Cross Yen gains helped the USD/JPY avoid a steep drop, closing around 109.73.

EUR/USD

• The euro started around 1.1791 per euro to 1.18, fluctuating early in the week. On Wednesday, European August CPI rose to +3.0%, fueling expectations of earlier monetary tightening, and euro buying strengthened. With subsequent US economic data not meeting expectations, the euro generally trended upward, and after Friday's employment data, it reached a high of 1.1910 before closing at 1.1882.

USD/CNH

• The yuan started at 6.4605 per dollar. A weaker Chinese August PMIs data on Tuesday temporarily pushed yuan lower, but over the week, the dollar's weakness allowed the yuan to strengthen. At the week's end, US August employment data showed a low of 6.4233 before closing at 6.4344.

What Happened Last Week

30th

• Eurozone August Consumer Confidence ▲5.3
• Eurozone August Economic Confidence 119.0
• US July Housing Pending Home Sales ▲1.8%

31st

• Japan July Unemployment Rate 2.8%
• Japan July Appointments to Job Offers 1.15
• Japan July Industrial Production ▼1.5%
• China August Manufacturing PMI 50.1
• Eurozone August HICP +3.0%
• India Q2 FY Domestic Gross Product +20.1% (YoY)
• June Case-Shiller US Home Price Index +19.1% (20-City YoY)
• August Chicago Purchasing Managers Index 66.8
• US August Consumer Confidence 113.8

1st

• Australia Q2 2024 GDP +9.6% (YoY)
• China August Caixin Manufacturing PMI 49.2 (Weak)
• Eurozone August Manufacturing PMI 61.4
• Eurozone July Unemployment Rate 7.6%
• Brazil Q2 GDP +12.4% (YoY)
• US August ADP Employment +374,000
• US August Manufacturing PMI 61.1
• US August ISM Manufacturing 59.9

2nd

• Eurozone July Un wholesale Price Index +12.1%
• US Previous Week Initial Jobless Claims 340,000
• US July Trade Balance −$70.1B
• US July Durable Goods New Orders +0.4%

3rd

• China August Caixin Services PMI 46.7 (Weak)
• Eurozone July Retail Sales +3.1%
• US August Employment Situation: Nonfarm Payrolls +235,000; unemployment rate 5.2%
• US August Services PMI 55.1
• US August ISM Non-Manufacturing PMI 61.7
• Prime Minister Yoshihide Suga announces he will not run in the Liberal Democratic Party leadership election.
• Russian President Vladimir Putin delivers a speech at the Eastern Economic Forum in Vladivostok,stating that a special economic zone will be established to attract foreign investment to the Northern Territories. He also said at the forum that the lack of a peace treaty with Japan is nonsense and expressed willingness to advance negotiations toward a peace treaty.

Glossary

• GDP = Gross Domestic Product: high growth is good
• CPI = Consumer Price Index: many advanced economies target 2%
• PCE = Personal Consumption Expenditures: consumer spending; highly correlated with consumer prices
• PPI = Producer Price Index: influences CPI
• PMI = Purchasing Manager Index: 50 is the baseline
• ZEW = Leibniz Centre for European Economic Research: 50 is the baseline
• NAHB = National Association of Home Builders: 50 is the baseline
• New York Fed Manufacturing Index: 0 is the baseline
• Philadelphia Fed Manufacturing Index: 0 is the baseline
• Richmond Fed Manufacturing Index: 0 is the baseline
• Chicago PMI: 50 is the baseline
• University of Michigan Consumer Sentiment Index: indexed with 1966 = 100
• S&P/ Case-Shiller Home Price Index: the 20-Ccity Home Price Index is widely used; an important indicator for housing market trends that affect the economy
• Housing Pending Sale Index: counts homes under contract but not yet closed
• European Consumer Confidence Index: 2000–2020 average = 100; reported as YoY change in flash
• European Confidence Indicator: 2000–2020 average = 100; reported as actual values
• Consumer Confidence Index: index with 1985 = 100

Key Economic Indicators and Political Events

6th

• US Holiday (Labor Day)
• Blinken to visit Qatar and Germany (through the 8th)
• Austin to visit Qatar, Bahrain, Kuwait, and Saudi Arabia.

7th

• Time unspecified: China August Trade Balance
• 08:50 Japan August Foreign Exchange Reserves
• 13:30 Reserve Bank of Australia (RBA) policy rate announcement
• 14:00 Japan July Economy Watchers Survey
• 18:00 Europe September ZEW Economic Sentiment Survey
• 18:00 Eurozone 4-6 quarter GDP (Q1 2024 final)

8th

• US-hosted international conference on Afghanistan (online)
• 08:50 Japan Q2 2024 GDP (revised)
• 08:50 Japan July International Balance of Payments
• 14:00 Japan August Economy Watchers Survey
• 20:00 US MBA Mortgage Applications Index
• 23:00 Bank of Canada Policy Rate Announcement
• 27:00 US Regional Fed Economic Report
• 28:00 US July Consumer Credit Outstanding

9th

• North Korea Foundation Day
• 08:50 Japan August Money Stock M2
• 10:30 China August Price Indices
• 20:45 ECB Policy Rate
• 21:30 Lagarde, ECB President, Press Conference
• 21:30 Initial Claims for Unemployment Insurance (Previous Week)

10th

• 18:30 Lagarde, ECB President, Speech
• 19:30 Russia Policy Rate
• 21:30 US August PPI

Beyond Next Week

• September 11: 20th anniversary of the 9/11 attacks
• September 11: SCO Anti-Terror Joint Military Exercises (Russia Orenburg region to 25th)
• September 21–22: BOJ Monetary Policy Meeting
• September 21–22: FOMC
• September 26: German Federal Election
• September 29: LDP Leadership Election
• October 27–28: BOJ Monetary Policy Meeting
• October 28: ECB
• October 30–31: G20 Leaders' Summit
• November 2–3: FOMC
• December 14–15: FOMC
• December 16: ECB
• December 16–17: BOJ Monetary Policy Meeting

Last Week's USD and JPY Exchange Rate Strength Rankings

Dollar weakness was dominant

• Yen weakness and cross-yen rise
• Continued standout unwinding of emerging market currencies (e.g., South Africa)
• Australia/New Zealand dollars also saw substantial rebound
• Renminbi and Russian ruble continued to move relatively stably
• In summary, currency strength/weakness as shown on the right isEmerging markets > Australia/New Zealand > Russia > Euro > Renminbi > Yen > Dollar

整理 of the Global Macro Environment

• Remain vigilant on Afghanistan region developments. Be wary of the militant group Islamic State, the Taliban, and further US-led turmoil expansion.
• There are signs of a turning point in China’s economy. Survey data appears to be slipping below the neutral 50 level since the COVID crisis, indicating growing US-China confrontation effects.Renminbi depreciation risk。
• With Prime Minister Suga deciding not to run in the leadership election, Japan’s political landscape is unsettled. Generally considered a yen depreciation driver.Yen weakness factor to be noted.
• Watch whether the two-week-long risk-on行情 becomes the mainstream.Key: prolongation of U.S. monetary easing and signs of COVID recovery。
• Be aware of potential re-acceleration of COVID-19 cases (attached chart Daily New Cases shows a flat-to-down trend with 7-day moving average)
• Investors’ expectations for US monetary policy point to tapering decision within the year and rate hikes starting by end-2022 as a consensus.Weak US economic indicators have pushed back rate hike expectations since last week.
• As August begins, be mindful of two scenarios: a shift in direction may occur, but September and October could follow August’s market pattern as well. US equities have historically weak performance in August-October (seasonality).

COVID-19 new cases numbers, excerpt from Worldometers

Market participants’ FOMC rate hike expectations, excerpt from CME Group

Chart Analysis

USD Index (Daily)

• US economy isn’t weak, but dollar strength is not persistent
• Be mindful of a mid-to-long-term dollar decline scenario

USD/JPY Mid-term (Daily)

• Wide range approximately 107.50–111.65
• Recently, range bound between 109.00–111.00
• Be aware that directional clarity may remain elusive
• On the other hand, yen depreciation pressure remains strong,and the view is that upside pressure is strengthening

USD/JPY Short-term (Intraday)

• Even finer range around 109.20–110.20
• Watch whether the range breaks upward

EUR/USD Mid-term (Daily)

• Wide range: 1.1630–1.2250
• With dollar weakness,Euro buying has intensified

EUR/USD Short-term (Intraday)

• Break of 1.1800 resistance
• There is no significant resistance up to 1.2250

USD/CNH Mid-term (Daily)

• Range judged 6.35–6.60
• Lately, dollar weakness and yuan strength trend continues

USD/CNH Short-term (Intraday)

Currently testing the recent low around 6.40

• However, concerns about China’s economy remain, so monitor for yuan depreciation risk

This Week’s Toda Trading Strategy

Overall Policy

• Keep a close eye on Chinese and Japanese stock markets to detect early risk-off signals
• Be aware that the curve of COVID-19 new cases is slowing, suggesting risk-on may continue(Be mindful of continued risk-on)
• Gradually, investors may return and directional conviction could emerge(Assess whether risk-on or profit-taking predominates)
• The USD has weakened as the August US payrolls data suggested that rate hike expectations are being pulled back (Possible continuation of dollar weakness)
• Expect political volatility from Prime Minister Suga’s decision not to run and the prolongation of monetary easing, and front-run yen selling.Keep yuan holding in mind, considering US-China tensions and domestic demand weakness; reduce positions if necessary
• Continued yuan holding。
• Euro shows signs of recovery in economic indicators; consider buying first.

USD/JPY

• Last Friday close: 109.73
• View: range-bound to upside
• Projected range: 109.00-111.00
• Current position: USD/JPY +2.0
• Strategy: deem EUR/JPY more favorable than USD/JPY and plan to switch to a long EUR/JPY at the start of next week

EUR/USD, EUR/JPY

• Last Friday close: EUR/USD 1.1882
• Projected range: EUR/USD 1.1800–1.2000
• View: EUR/USD flat to up; EUR/JPY up
• Current position: EUR/USD ±0; EUR/JPY ±0
• Strategy: build long EUR/JPY and hold positions that may cross weeks

CNH/JPY, USD/CNH

• Last Friday close: USD/CNH 6.4344
• Projected range: USD/CNH 6.4500–6.4000
• View: USD/CNH flat-to-down, CNH/JPY flat-to-up
• Current position: USD/CNH ± 0.0, CNH/JPY +3.0
• Strategy: maintain long CNH/JPY
• Be alert to deterioration in China’s economy

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