[September 27 to October 1] Trade strategy considering the Liberal Democratic Party presidential election and U.S. interest rate rise

Last Week's Foreign Exchange Range (Volatility Range)

Last Week's FX Market Summary

USD/JPY

• Last week's dollar-yen movement started at 109.97 yen per dollar. Amid circulating rumors about Evergrande, market sentiment was risk-off. The USDJPY gradually declined, reaching 109.13 in Tokyo time on Wednesday. However, after reports that PBOC (People's Bank of China) provided a large amount of liquidity to the short-term money market,the Chinese authorities' readiness to support financial markets became clear, and sentiment rapidly improved, triggering a yen-weakening trend. In U.S. trading hours on Wednesday,as the FOMC communication suggested tapering announcements for November and tapering completion around mid-2022, U.S. rates rose and dollar buying intensified.The dollar continued to rise, breaking 110 on Thursday, and closed near the upper 110s, with a high of 110.79 and a close around 110.74 on the weekend.

EUR/USD

• The euro started at 1.1732 dollars per euro.With large option positions on both sides, movement remained subdued until the FOMC meeting on Wednesday.At the FOMC, as noted above, dollar strength caused the euro to fall to as low as 1.1683, but it did not break lower and gradually rebounded, with some upside back toward 1.1750. By the weekend, it closed near 1.1719, roughly the same as the start of the week.

USD/CNH

• The yuan started at 6.4712 per dollar. Early in the week, amid rumors about Evergrande, dollar buying and yuan selling dominated, pushing the dollar to as high as 6.4880. But once the PBOC reported large liquidity injections on Wednesday, Chinese authorities' support stance became clear, and yuan buying strengthened. On Thursday, it fell to 6.4526 as yuan buying intensified. The week closed at 6.4620.

Last Week's Events

20th

• Japan and China were on holidays (Respect for the Aged Day, Mid-Autumn Festival)
• U.S. September NAHB Housing Market Index 76
• In Canada, the Liberal Party led by Prime Minister Trudeau won again as the first partyBut did not secure a majority, likely returning to a minority government, and will rely on cooperation with other parties to pass laws and budgets.

21st

• China was on holiday
• U.S. Q2 2021 current account balance ▼$190.3 billion
• U.S. August housing starts +161.5k (strong)
• U.S. August building permits +172.8k (strong)
• U.S. Democratic-controlled House approved a continuing resolution through December 3 to suspend the debt ceiling through December 16, 2022; Senate balance remains uncertain.The Senate is closely divided, so passage is unclear.

22nd

• Bank of Japan kept policy rate at -0.1%
• U.S. August existing home sales 5.88 million
• Europe September Consumer Confidence -4.0
• FOMC indicated tapering in November and completion by mid-2022 in the statement and Powell's press conference.
• Brazil Central Bank raised policy rate by 1.0 percentage point to 6.25%
• China's real estate giant Evergrande announced it would make yuan-denominated bond payments due on the 23rd. Amounts: 232 million yuan. Evergrande faces about 1.9665 trillion yuan in liabilities, triggering credit concerns and rising bond yields.

23rd

• Japan was on a holiday (Autumn Equinox)
• South African Reserve Bank kept policy rate at 3.5%
• Swiss National Bank kept policy rate at -0.75%
• Norway’s central bank raised policy rate by 0.25% (first hike by a developed country since the pandemic)
• Eurozone September Manufacturing PMI 58.7
• Eurozone September Services PMI 56.3
• Bank of England kept Bank Rate at 0.10%
• U.S. initial jobless claims 351k
• U.S. September Manufacturing and PMI 60.5
• U.S. September Services PMI 54.4
• U.S. August Composite Leading Economic Index +0.9%
• Taiwan authorities officially applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

24th

• Japan August nationwide CPI 0.0%
• U.S. August new home sales +1.5%
• People's Bank of China fully prohibited crypto asset (virtual currency) settlements and related services. deemed illegal financial activity with possible criminal liability; overseas exchanges serving China via the Internet would also be illegal.
• IAEA's annual General Conference adopted a unanimous resolution urging North Korea to take concrete steps toward denuclearization; noted continuing nuclear development violates UN Security Council resolutions and expressed "deep regret."
• Leaders of Japan, the U.S., Australia, and India met in-person at the White House; in a joint statement they pledged to counter challenges to a rules-based maritime order in the East and South China Seas and agreed to hold annual meetings among the four leaders and foreign ministers.

Explanation of Economic Terms

• GDP = Gross Domestic Product; high growth is good
• CPI = Consumer Price Index; many advanced economies target 2%
• PCE = Personal Consumption Expenditures; closely 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
• 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 widely uses the 20-City Composite; important for monitoring housing market impact on the economy
• Housing Permits Index: measures houses under contract but not yet delivered
• European Consumer Confidence Index: indexed to 100 for average 2000-2020
• European Economic Sentiment Index: indexed to 100 for average 2000-2020
• Consumer Confidence Index: indexed with 1985 = 100
• Japan Coincident Index: indexed with 2015 = 100
• Japan Tankan (Short-term Economic Survey) Index: 50 baseline
• Japan Corporate Goods Price Index: 0 baseline

Key Economic Indicators and Political Events

27th

• 20:45 Lagarde, ECB President, testimony on economy and monetary policy
• 21:30 U.S. August durable goods orders

28th

• Time TBA BOJ Policy Meeting Minutes
• 21:00 Lagarde, ECB President, keynote at ECB Forum on steering monetary policy through the pandemic
• 22:00 July Case-Shiller U.S. Home Price Index
• 23:00 U.S. September Consumer Confidence Index
• 23:00 September Richmond Fed Manufacturing Index

29th

• Time TBA LDP Presidential Election Voting
• 18:00 Europe September Consumer Confidence
• 18:00 Europe September Economic Confidence
• 23:00 U.S. August Housing Permits
• 23:30 U.S. Weekly Crude Oil Inventories
• 24:45ECB Forum: “Monetary Policy to Overcome the Pandemic” with remarks from Kuroda, Governor of the Bank of Japan; Powell, Chair of the U.S. Federal Reserve; Lagarde, ECB President

30th

• 08:50 Japan August Industrial Production
• 10:00 China September Manufacturing PMI
• 10:45 China September Caixin Manufacturing PMI
• 16:10 Address by Kuroda at National Securities Conference
• 18:00 Europe August Unemployment Rate
• 21:30 U.S. initial jobless claims
• 21:30 U.S. Q2 2021 GDP (Second Estimate)
• 21:30 U.S. Q2 2021 Core PCE (Quarterly annualized)
• 22:45 September Chicago PMI

1st

• China & Hong Kong National Day holiday (Mainland holiday through the 7th)
• 08:30 Japan August unemployment rate
• 18:00 Europe September Consumer Price Index (HICP)
• 21:30 U.S. August Personal Consumption Expenditures (PCE Deflator)
• 23:00 U.S. September University of Michigan Consumer Sentiment Index (Final)
• 23:00 U.S. September ISM Manufacturing Index

Going Forward

• Sept 29: LDP Presidential Election
• Sept 30: LDP Presidential Term Ends
• Oct 1: New LDP President's Term Begins
• Oct 27-28: BoJ Monetary Policy Meeting
• Oct 28: ECB
• Oct 30-31: G20 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 Strengths/Weaknesses,” “Global Macro Environment Overview,” “Chart Analysis,” “Toda's Trading Strategy for This Week”) these are paid articles

Last Week's Currency Strength

• Dollar strength was dominant (142/196 currencies fell in value)
• Even as the dollar strengthened, risk-on continued,Cross-yen stayed firm
• NOK (Norwegian krone) that carried out a rate hike is strong
• TRY (Turkish lira) that lowered rates is weak
• In summary, currency strength/weakness is as followsAdvanced economies that raised rates (e.g., Norway) > Chinese yuan and US dollar and euro > Japanese yen > Emerging markets that cut rates (e.g., Turkey)

Overview of the Global Macro Environment

• Attention is focused worldwide on the default of Evergrande Group, a major Chinese real estate developer.Regarding Evergrande, of course, we need to continue to monitor China’s “economic sentiment” closely. (Renminbi depreciation factor)
• However, the PBOC (People's Bank of China) showing a stance to support financial markets is favorable. At least until the National Day holiday, this stance is expected to continue.(Risk-on factor)
• Global semiconductor shortages are severe. Japanese automakers are increasing inventories, and in China mobile phone production is becoming difficult, indicating microeconomic impacts. These phenomena contribute to rising semiconductor prices and thus to higher product costs,driving global inflationary pressures.
• As a result, global producer prices remain high, squeezing corporate earnings and potentially weighing on stock prices.(Bearish for equities)
• With inflation pressures, the FOMC signaled an early completion of tapering.The market is pricing in rate hikes, US Treasury yields are rising, which has led the dollar to strengthen and USD/JPY to test higher levels.These should put some downward pressure on the stock market as well.(Dollar strength, stock weakness factor)
• Voting in the Liberal Democratic Party leadership election on the 29th.Basically, whichever candidate becomes leader, they are expected to continue Abenomics. Any stability would be a yen-weakening and stock-positive factorto be interpreted as such.In particular, Ms. Taro Aso’s policy proposals are likely to be expansive, potentially supporting yen weakness and stock gains.
• Will risk-on conditions become the main trend? Watch closely.The key remains the containment of COVID-19 and the prolongation of US monetary easing.
• New COVID-19 infections continue to trend downward（The attached Daily New Cases chart shows a downward slope on the 7-day moving average）
• Investors’ expectations for US monetary policy point to tapering decision and announcements in November, with rate hikes expected to begin in the second half of 2022 as consensus.（Rate hike expectations have rapidly accelerated）

COVID-19 New Infections, excerpt from Worldmeters

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

Chart Analysis

USD Index (Daily)

• The US Dollar Index is an indicator of overall dollar strength (basket composition: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%, CHF 3.6%)
• Rising US rates have continued to push toward the 93.4 resistance
• This week, focus on whether it can clear 93.4

USD/JPY Medium-term (Daily)

• Wide range of 107.50–111.65
• Core range remains 109.00–111.00
• It is approaching 111.00, watch whether it breaks above
• If broken, the January high of 111.65 would be in focus

USD/JPY Short-term (Intraday)

• Narrower range of 109.10–110.50; 109.10 acts as support, break of 110.50
• Whether it can break through 110.80–111.00 is the near-term focus

EUR/USD Medium-term (Daily)

• Wide range 1.1630–1.2350
• The move continues to test the lower bound of the range

EUR/USD Short-term (Intraday)

• Core range 1.1670–1.1900
• In a tight range, 1.1670–1.1750
• Two weeks of large option contracts up and down have made the range feel stronger

USD/CNH Medium-term (Daily)

• Broadly in a range of 6.35–6.60
• Recently 6.4250 around has been acting as support

USD/CNH Short-term (Intraday)

• Short-term range 6.4250–6.5200
• Core range 6.4250–6.4870
• Still watching Evergrande and related topicsBe cautious of negative news that could push the yuan weakerand want to stay vigilant

This Week’s TodA Trading Strategy

Overall Policy

• Keep monitoring the trends in Japan, China, and the US stock markets to detect risk-off signals early(Be wary of risk-off)
• Dollar is likely to have room to risein US rate increasesBullish bias
• Assuming Japanese politics stabilize and monetary easing continues long-term,expect a bullish stance for Japanese stocks and a generally weaker yen
• Factor in the possibility of domestic economic slowdown in China due to Sino-US tensions and power struggles(It may not crash sharply, but be wary of sudden declines)
• The euro shows signs of economic indicators turning upward,so buy on dips, but fully consider movements of the dollar

• Last Friday’s close: 110.74
• View: Upward
• Expected range: 110.50–111.65
• Current position: USD/JPY +1.0
• Strategy: If it dips toward around 111.50, buy the dip; if it rises, ride the uptrend

EUR/USD, EUR/JPY

• Last Friday’s close: EUR/USD 1.1719
• View: EUR/USD range-bound to slight decline; EUR/JPY range-bound
• Expected range: EUR/USD 1.1670–1.1750
• Current positions: EUR/USD ±0, EUR/JPY ±0
• Strategy: Expect the range to continue; focus on EUR/USD by buying near 1.1670 and selling at 1.1750; trade small amounts while watching the US dollar moves and options/orders

CNH/JPY, USD/CNH

• Last Friday’s close: USD/CNH 6.4620
• View: USD/CNH flat, CNH/JPY flat to higher
• Expected range: USD/CNH 6.4250–6.4870
• Current positions: USD/CNH ± 0.0, CNH/JPY +2.0
• Strategy: Consider selling USD/CNH on rebounds (judge using oscillators and levels); maintain CNH/JPY long positions (medium-long term); consider buying CNH/JPY on dips。
• Be cautious of the impact of worsening Chinese economy and Evergrande default on CNH/JPY, and look to add to CNH/JPY on declines

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