[September 20–24] Trade strategy mindful of Wednesday's FOMC and Evergrande Group debt issues

Last Week's FX Range (Volatility)

Last Week's FX Market Summary

USD/JPY

• Last week's USD/JPY started at 109.89. Early in the week, dollar buying pushed the pair up to 110.16 by Tuesday, butwhen the U.S. August CPI released in New York trading was weaker than expected at 5.3%, expectations for early tightening faded and dollar selling dominated (the CPI level is high in absolute terms, but the market expected even higher). The dollar weakened below 110 and slid to a weekly low of 109.11 by Wednesday New York time.However, stronger September NY Fed manufacturing index (34.1, 0 is the baseline) on Wednesday renewed dollar strength, and Thursday's U.S. August retail sales and September Philadelphia Fed manufacturing index also supported stronger dollar buying.In the end, USD/JPY recovered to around 110.07 and closed at 110.00.

EUR/USD

• The euro started at 1.1813 against the dollar. Early in the week euro selling pushed to around 1.1770, but weaker-than-expected U.S. CPI on Tuesday New York time led to euro buying, lifting to around 1.1840 by European Wednesday. After that, stronger U.S. data later Wednesday pressured the euro, and by Thursday it fell below 1.1800 again. By the weekend it extended losses to a weekly low of 1.1724 and closed there at 1.1724.

USD/CNH

• Dollar started at 6.4452 yuan. Early in the week dollar buying faded to yuan selling; declines continued Tuesday and Wednesday, and Thursday tested the 6.4250 support but was repelled (3rd time this month). On Friday, amid Evergrande concerns, profit-taking pushed back toward 6.4450, and then European time saw heavy CNH selling pushing to 6.4739 before closing at 6.4710.

Events of Last Week

13th

• Japan Q3 2023 corporate sector outlook survey: Large firms 3.3, Medium 0.2, Small -18 (weak)
• Japan July domestic corporate goods price index +5.6%
• U.S. August monthly budget deficit -$302.1 billion (deficits have been expanding since the pandemic due to ramped-up spending)
• The Taliban-controlled Afghanistan was discussed at a United Nations ministerial meeting in Geneva, Switzerland. The U.S. and 95 other countries announced new contributions totaling nearly $640 million (about 70 billion yen), with total aid surpassing $1.1 billion.

14th

• Japan July industrial production -1.5%
• Japan July capacity utilization -3.4%
• U.S. August CPI +5.3% (below expectations)
• UN General Assembly opened at the U.N. headquarters in New York. The second post-pandemic General Assembly aims to host high-level speeches at the headquarters with limited attendees, and online meetings on aid for developing countries and security council talks on climate change are also planned.

15th

• Japan July machinery orders +0.9%
• China August retail sales -1.45%
• China August industrial production +5.3% (year over year)
• Japan July tertiary industry activity index -0.6%
• Europe July industrial production +1.5%
• U.S. MBA mortgage applications +0.3%
• U.S. September NY Fed manufacturing sector index +34.3 (strong)
• U.S. August price index: imports -0.3%, exports +0.4%
• U.S. August industrial production +0.4%
• U.S. August capacity utilization 76.4%
• South Korea Joint Chiefs of Staff announced North Korea launched two ballistic missiles toward the Sea of Japan.
• EU Commission President Ursula von der Leyen said in a speech that “authoritarian regimes are trying to gain influence in the Indo-Pacific region” as a warning to China, etc.

16th

• Japan August trade statistics -6.354 billion yen
• Europe July trade balance +€2.07 billion
• U.S. August retail sales +0.7% (holding at a high level)
• Philadelphia Fed manufacturing index for September 30.7 (strong)
• U.S. jobless claims for the week ending (prior week) 332,000
• U.S. July corporate inventories +0.5%
• U.S. July net capital inflows from abroad $1260 billion
• IAEA board meeting in Austria criticized Iran's accelerated nuclear development by Western powers
• China applied to join the Trans-Pacific Partnership (CPTPP).
• Japan's government, in September's monthly economic report, said the economy shows signs of recovery but the pace has slowed, downgrading the assessment for the first time in four months. Ongoing COVID-19 infections are affecting supply from Southeast Asia, leading to weaker auto production.

17th

• Europe July current account +€30.2 billion
• Europe July construction spending +0.1%
• Michigan University consumer sentiment index September 71.0
• The Shanghai Cooperation Organization summit led by China and Russia was held in Tajikistan. After the U.S. withdrawal, the Taliban regained power in Afghanistan, and coordinated responses to Afghan situation were emphasized.
• U.S. military disclosed that an airstrike in Afghanistan in late August killed 10 civilians, possibly up to seven of them children.

Economic Terms Explained

• GDP = Gross Domestic Product; high growth is good
• CPI = Consumer Price Index: many advanced economies target around 2%
• PCE = Personal Consumption Expenditures: 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: 0 is the baseline
• NAHB = National Association of Home Builders: 50 is the baseline
• NY Fed manufacturing index: 0 is the baseline
• Phila 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: index with 1966=100
• S&P/Case-Shiller Home Price Index is widely used, especially the 20-CMS index; important for assessing housing market impact on the economy
• Housing Pending Home Sales Index: contracts signed but not yet delivered
• European Consumer Confidence Index: 100 around 2000–2020 average, released month-over-month
• European Economic Confidence Index: 100 around 2000–2020 average, released as actual values
• Consumer Confidence Index: indexed with 1985=100
• Japan's Coincident Index: indexed with 2015=100
• Japan’s Economy Watchers Sentiment: 50 is the baseline
• Japan Corporate Goods Price Index: 0 baseline

Key Economic Indicators and Political Events

20th

• Japan and China are holidays (Respect for the Aged Day, Mid-Autumn Festival)
• IAEA General Conference (Vienna, until 24th)
• Canada federal election

21st

• China is on holiday
• 21:30U.S. August housing starts
• 21:30U.S. August building permits

22nd

• BOJ Policy Board meeting + Governor Kuroda press conference
• 23:00 U.S. August existing home sales
• 23:00 European September consumer confidence
• 27:00FOMC + Powell press conference
• 30:00 Brazil central bank policy decision

23rd

• Japan is a holiday (Autumn Equinox)
• South African Reserve Bank policy announcement
• 16:30 SNB to announce 3-month policy rate midpoint
• 17:00European manufacturing and services PMI
• 20:00Bank of England policy announcement
• 21:30 U.S. initial jobless claims
• 22:45U.S. manufacturing and services PMI
• 23:00 U.S. Composite Leading Economic Index

24th

• U.S.-Japan-Australia-India Quad summit (COVID measures, cyber defense, semiconductor supply, etc.)
• 08:30 Japan August nationwide CPI
• 23:00 U.S. August new home sales
• 23:00Powell, Fed Chair, speech(Fed webcast discussing the economy's post-pandemic recovery)

Beyond Next Week

• Sept 21–27: UN General Debate
• Sept 26: German federal elections
• Sept 29: Liberal Democratic Party leadership election (Japan)
• Oct 27–28: BoJ Monetary Policy Meeting
• Oct 28: ECB
• Oct 30–31: G20 Leaders' Summit
• Nov 2–3: FOMC
• Dec 14–15: FOMC
• Dec 16: ECB
• Dec 16–17: BoJ Monetary Policy Meeting
• Jan 17–21: Davos Conference

From here on (“Last Week’s Currency Strength/Weakness,” “Global Macro Environment Overview,” “Chart Analysis,” “This Week’s Toda’s Trading Strategy”) are paid articles

Last Week's Currency Strength

※ Visualizes currency performance to help infer the current market theme

• Dollar strength was dominant (136/196 currencies declined in value)
• As the dollar strengthened, overallCross-Yen weakened
• The only gains were the Russian ruble, natural gas pipeline, and Nord Stream completion announcements
• Emerging markets such as South Africa and Turkish lira were pressured as growth engines weakened
• Oceania also weak
• The yuan was sold modestly but remained relatively stable
• In summary, currency strength/weakness is as followsRussian ruble > US dollar > Japanese yen > Chinese yuan > euro > Oceania > weak emerging-market currencies

Global Macro Environment Overview

• Global semiconductor shortage remains severe. Car makers are rebuilding inventories, and in China manufacturing of mobile phones is extremely challenging. Such phenomena contribute to rising semiconductor prices and overall cost inflation,driving global inflationary pressures.
• As a result, global producer prices stay high, squeezing corporate earnings and potentially weighing on stock prices.(Bearish for stocks)
• Watch carefully the defaults of Chinese property giant Evergrande, etc.—China's "economic slump" warrants ongoing attention.（Depreciation pressure on CNY）
• Focus on the Liberal Democratic Party presidential election.Primarily a factor for Yen depreciation and stock gains to be anticipated.（In particular, Ms. Takaichi is expected to react with a weaker yen and higher stocks）
• Monitor whether risk-on becomes the main trend.Key is COVID-19 resolution and the prolongation of U.S. monetary easing.
• Rebound of COVID-19 cases has paused for a while（The attached chart Daily New Cases shows a seven-day moving average turning downward）
• Investors expect the U.S. monetary policy path to taper within the year, with rate hikes starting in December 2022, a consensus.（This schedule has largely settled）
• U.S. stocks tend to underperform from August to October on a seasonal basis.（Risk-off factor）

COVID-19 new cases, excerpt from Worldometers

Chart Analysis

USD Index (Daily)

• Dollar Index indicates overall dollar strength (basket composition: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%, CHF 3.6%)
• With strong U.S. economic data, it is likely to test the 93.0–93.4 resistance again
• Depends on Wednesday's FOMC outcome

USD/JPY Medium-term (Daily)

• Wide range around 107.50–111.65
• Core range remains 109.00–111.00
• Expect a range-bound market without clear direction

USD/JPY Short-term (Hourly)

• Narrower range: 109.10–110.50
• Currently located slightly above the center of the range
• However, selling orders are still abundant above,so upside may be heavy

EUR/USD Medium-term (Daily)

• Wide range: 1.1630–1.2250
• Has tested the lower bound of the range again
• HoweverEuropean data are not bad, and the outcome depends on the U.S. dollar

EUR/USD Short-term (Hourly)

• Narrow range: 1.1670–1.1900
• In the short term, it has entered an oversold level
• If it falls further, expect a rebound driven by buyers.

USD/CNH Medium-term (Daily)

• Broad range identified as 6.35–6.60
• Recently, around 6.4250 acts as support

USD/CNH Short-term (Hourly)

• Short-term range: 6.4250–6.5200
• In the short term, overbought levelsare emerging
• With Evergrande-related news and other negatives, watch for CNY weakness cautiously.

This Week's Tod's Trading Strategy

Overall Policy

• Continue to monitor Japanese, Chinese, and U.S. stock markets to sense risk-off signals early（Be wary of risk-off）
• This week, focus on Wednesday's FOMC. While large moves are unlikely, stay vigilant.In particular, consider reducing dollar positions before data releases.
• Expect Japanese politics turmoil and prolonged monetary easing to support Japanese stocks and a relatively weaker yen（expect yen weakness and higher stocks）
• Consider the domestic economy slowdown risk from U.S.-China tensions and power struggles (not likely to crash dramatically, but be wary of sudden drops)
• The euro may show improvement in economic indicators,so buy on dips.

• Last Friday's close: 110.00
• View: trading range-bound
• Expected range: 109.10-111.50
• Current position: USD/JPY +1.0
• Strategy: in the near term trade without a strong market view, buy near 109.10 and sell near 111.50

• Last Friday's close: EUR/USD 1.1724
• View: EUR/USD range-bound to higher; EUR/JPY range-bound to higher
• Expected range: EUR/USD 1.1670–1.1900
• Current position: EUR/USD ±0; EUR/JPY ±0
• Strategy: focus on EUR/USD, buying near 1.1670 and using appropriate options or orders to sell as needed

CNH/JPY, USD/CNH

• Last Friday's close: USD/CNH 6.4710
• View: USD/CNH range-bound to higher, CNH/JPY range-bound to lower
• Expected range: USD/CNH 6.4250–6.5200
• Current positions: USD/CNH ± 0.0; CNH/JPY +3.0
• Strategy: consider selling USD/CNH on a rebound (based on oscillator and levels), reduce CNH/JPY long positions (medium-long term)
• Be wary of the impact of deteriorating Chinese economy and Evergrande defaults; if a short-term favorable move arises, trim CNH/JPY positions

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