[October 18 to October 22] Trade strategy considering the monetary policies of various countries

Last Week's Foreign Exchange Range (Fluctuation Range)

Last Week's Forex Market Summary

USD/JPY

• Last week's dollar-yen movement started at 112.18. From the start of the week, yen selling dominated, and after breaking above the 112.20 resistance, by Monday's New York session it surpassed 113, rising to 113.80 on Tuesday's New York session. On Wednesday and Thursday it traded within a range, and on Friday broke through 113.80 and entered the 114 yen area. It briefly rose to around 114.47 before closing at the high 114.25 range. With no new catalysts, it was a week where the yen was sold across the board.

EUR/USD

• The euro started at 1.1578 dollars per euro. Early in the week, dollar buying was somewhat stronger, and the euro fell to 1.1524 in Tuesday's New York session. However, subsequent buying interest prevailed, and on Thursday it retraced to 1.1600, then traded around 1.16 and closed near 1.16.

USD/CNH

• The yuan started at 6.4454 per dollar. At the start of the week, dollar buying was stronger, pushing to 6.4643 briefly on Tuesday. But once China’s September trade data showed solid results, yuan buying gained ground, and by Friday it fell to 6.4223. Over the weekend it recovered slightly to 6.4328.

Events of the Week

11th

• None in particular

12th

• Korea Central Bank holds policy rate at 0.75%
• Japan September Corporate Goods Price Index +6.3% (upward pressure observed)
• Eurozone October ZEW Economic Sentiment Index 21.0
• IMF revised world economic outlook: 2021 real GDP growth forecast at 5.9% (down 0.1 points from July)previous

13th

• China September trade surplus +66.76 billion USD (very strong)
• Japan September M2 Money Stock +4.2%
• Japan August Machinery Orders ▲2.4%
• Euro Area August Industrial Production ▲/▼? (in the original it shows ▲1.6％ for August mining/industrial production)
• U.S. September Consumer Price Index +5.4% (still elevated)
• G20 held an online summit on Afghanistan issues. EU Commission President von der Leyen pledged 1 billion euros in humanitarian aid; Japan pledged about $2 billion in humanitarian assistance.
• IEA says to reach net-zero emissions by 2050, coal must be cut by 50% and oil by 20% by 2030 relative to 2020; current policies are not sufficient
• FRB minutes from the Sept 21–22 FOMC released; if tapering begins at next meeting, it would start reducing asset purchases in mid-November or mid-December and complete tapering around mid-2022.

14th

• Australia September employment: net jobs change -137,000; unemployment rate 4.6%
• China September CPI +0.7%
• China September PPI +10.7% (continued upward pressure)
• Japan August Capacity Utilization -3.9%
• U.S. September Producer Price Index +8.6% (upward pressure continues)
• Initial jobless claims: 293,000 (back to pre-pandemic levels)
• Lower House dissolved; election campaign begins; Lower House election scheduled for 19th nomination and 31st voting. Prime Minister Fumio Kishida dissolved the House 10 days after taking office; shortest postwar span between dissolution and voting at 17 days. Issues include COVID-19 response and economic measures.

15th

• Euro Area August Trade Balance +1.11 billion euros
• October New York Fed Manufacturing Index 19.8
• U.S. September Retail Sales +0.7% (still high)
• October University of Michigan Consumer Sentiment 71.4
• Restrictions in Hokkaido, Fukuoka, and 5 other prefectures on dining hours ended; from 15th regular alcohol service and late-night operations resumed to normalize economic activity as infection rate slows
• China Huarong: CP Group parent company defaulted on debt with $226 million due, citing inability to repay principal and interest; rate 15% per year

Glossary of Economic Terms

• GDP = Gross Domestic Product; higher 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’s Index: 50 is the baseline
• ZEW = Leibniz Centre for European Economic Research: 0 is baseline
• NAHB = National Association of Home Builders: 50 is baseline
• New York Fed Manufacturing Index: 0 is baseline
• Philadelphia Fed Manufacturing Index: 0 is baseline
• Richmond Fed Manufacturing Index: 0 is baseline
• Chicago Purchasing Managers Index: 50 is baseline
• University of Michigan Consumer Sentiment Index: index with 1966 = 100
• S&P/ Case-Shiller Home Price Index: the "20-Ccity Composite Housing Price Index" is widely used; an important indicator for housing market trends affecting the economy
• Housing Pending Sales Index: represents number of contracts yet to close
• European Consumer Confidence Index: 2000-2020 average set at 100; published as month-on-month changes
• European Economic Sentiment Index: 2000-2020 average set at 100; published as actual values
• Consumer Confidence Index: indexed with 1985 = 100
• Japan Leading Economic Index: indexed with 2015 = 100
• Japan Business Confidence Survey: 50 is baseline
• Japan Corporate Goods Price Index (Japan Inc.’s corporate conditions index): 0 baseline

Key Economic Indicators and Political Events

18th

• Party Leaders' Debate (Japan Journalist Club)
• 06:45 Australia Q3 2023 Consumer Price Index
• 11:00 China Q3 2023 Quarterly GDP
• 11:00 China September Retail Sales
• 11:00 China September Industrial Production
• 29:00 U.S. August Net Foreign Securities Investment

19th

• Lower House public announcement
• China NPC Standing Committee
• 21:30 U.S. September Housing Starts
• 21:30 U.S. September Building Permits
• 27:00 U.S. September Monthly Budget Statement

20th

• 08:50 Japan September Trade Statistics
• 15:00 UK September CPI
• 17:00 South Africa September CPI
• 18:00 Euro Area September CPI
• 21:30 Canada September CPI
• 27:00 U.S. Beige Book (Beige Book)

21st

• EU Summit (through 22nd)
• 20:00 Turkey Central Bank policy rate
• 21:30 U.S. October Philadelphia Fed Manufacturing Index
• 21:30 U.S. Initial Jobless Claims
• 23:00 U.S. September Conference Board Leading Economic Index
• 23:00 U.S. September Existing Home Sales
• 23:00 Euro Area October Consumer Confidence

22nd

• 08:30 Japan September national CPI
• 17:00 Euro Area October PMI
• 19:30 Russia Central Bank policy rate
• 22:45 U.S. October PMI

Beyond Next Week

• Oct 27–28: Bank of Japan Monetary Policy Meeting
• Oct 28: ECB
• Oct 30–31: G20 Leaders Summit
• Oct 31: Lower House election results
• Nov 2–3: FOMC
• Dec 14–15: FOMC
• Dec 16: ECB
• Dec 16–17: Bank of Japan Monetary Policy Meeting
• Jan 17–21: Davos Forum

Last Week's Currency Strength

• Overall dollar weakness (124/196 countries)
• South Africa, Oceania, Russia, Norway, etc.Commodity currencies are strong
• Weak is the "yen".There is a possibility that the yen depreciation has entered a new phase.
• Factors behind the yen depreciation include continued Japanese quantitative easing, shrinking trade surplus, economic stagnation, and the establishment of a university fund (foreign currency operations equivalent to 9 trillion yen), along with political turmoil and the expectation that the path to rate hikes is long (because Japan's bond holders are over 75% in the Bank of Japan and financial institutions, raising rates would hurt, so investors expect no rate hikes and sell yen)
• Across-the-board, cross-yen pairs have been generally firm. USD/JPY up about 1.8%, other currencies up 2%–4%
• In summary, currency strength/weakness as followsCommodity currencies > Euro > Chinese yuan > US dollar > Japanese yen > Turkey (a country with political turmoil)

Organizing the Global Macro Environment

• Last week, U.S. long-term rates fell, lifting U.S. stocks and turning the market into a risk-on regime.
• Why did the U.S. long-term yield (10-year) fall from around 1.6% to around 1.5% (and rise in demand)? I think at 1.5%–1.6%, financial institutions’ bond investors are deciding to buy for the medium to long term.
• Thusthe environment does not look like long-range upward drift in U.S. long-term ratesis imminent
• If soU.S. stocks seem likely to stay resilient (not prone to sharp declines) and the risk-on environment, i.e.,yen-selling mood, will likely continue
• The keys remain the "COVID-19" situation, the supply-chain disruption caused by U.S.-China tensions, and the related "U.S. monetary policy."
• Trend of new COVID-19 cases continues to decline(the attached chart Daily New Cases shows a downward 7-day moving average) (risk-on factor)
• This week, CPI releases are scheduled in many countries, worth watching
• Global supply-chain fragmentation is driving higher global prices. As a result, producer prices stay high globally, squeezing corporate profits and putting downside pressure on stock prices. Be mindful of this.（Inflation and resulting corporate earnings pressure, and expectations of higher short-term rates）
• However, even if inflation spreads in Japan, raising rates will be difficult. Higher rates would hurt bond prices, impacting BoJ and private financial institutions that hold them.
• ThereforeI judge it better to sell the yen and straightforwardly buy currencies that can actually raise rates.
• Investors’ expectations for U.S. monetary policy point to tapering announced at the November 2021 FOMC and rate hikes beginning in the latter half of 2022 (current market participants’ expectations center around July 2022, which is about one FOMC meeting sooner than last month)（Dollar strength factor）

Chart Analysis

USD Index (Daily)

• Dollar Index shows overall dollar strength (basket composition: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%, CHF 3.6%)
• Trading in the range of 93.4–94.7
• U.S. economic data is strong, generally favorable for dollar strength, but some countries have moved to tighten earlier than the U.S., soexcessive dollar strength is not expected

USD/JPY Medium Term (Daily)

• In April 2019 and February 2020, cleared and rose past the high of 112.20
  
• Hit the target 114.40 level in one touch
• Next potential level around 115.50
• Likely to target the 125.86 high from June 2015, probably not in a straight line, but long-term yen depreciation is anticipated

USD/JPY Short Term (Intraday)

• Break through 114.40 resistance and move toward 115.50 expected
• If it pulls back, 114.00, 113.50, 113.00 are targets
• If it falls to 113.50, see it as a good opportunity to buy

EUR/USD Medium Term (Daily)

• Last week saw a recovery in buying interest
• Correction is slow; selling around 1.1600–1.1630 is reasonable
• However, with yen selling being strong, there may be less need to focus on USD-centric moves

EUR/USD Short Term (Intraday)

• Range of 1.1530–1.1630 identified
• If price breaks out of the range, reassess judgment

USD/CNH Medium Term (Daily)

• Broad range of 6.35–6.60
• Continued testing of 6.4250 support
• Last week briefly dropped below 6.4250, then rebounded; this week further downside testing is expectedBut the rebound is likely to be modest
• If it breaks lower, 6.35 is the downside target

USD/CNH Short Term (Intraday)

• Core range set at 6.4250–6.4650
• Center around 6.4450; plan to sell around this zone
• However, not likely to return too far before testing the downside

This Week's Todo: Todai Trading Strategy

Overall Policy

• Keep focusing on crude oil and natural gas prices; if they rise, inflationary pressure is high, corporate earnings deteriorate, stocks fall, and a risk-off scenario should be preparedrisk-off.
• Then monitor U.S. rate moves, especially 2-year and 10-year yields, and observe their correlation with the dollar and U.S. equities
• Assuming long-lasting Japanese monetary easing,front-run yen selling.
• Start buying the yuan.
• Euro may experience large chart breaks, so selling may lead..
• Buy currencies that are raising rates（NZD, NOK）
• Currency momentum judged as: Yuan ＞ USD ＞ Euro ＞ Yen

USD/JPY

• Last Friday's close: 114.20
• View: Upward
• Target range: 113.50–116.20 (looking higher)
• Current position: USD/JPY +3.0
• Strategy: Wait and see early next week, confirm a clean breakout above 114.40
• If it dips, buy on declines around 114.00, 113.50, 113.00
• If it rises, set stop-loss early and ride the up move

EUR/USD, EUR/JPY

• Last Friday's close: EUR/USD 1.1600
• View: EUR/USD range-bound to slight decline; EUR/JPY range-bound to slight rise
• Expected range: EUR/USD 1.1530–1.1630
• Current positions: EUR/USD ▲1.0 EUR/JPY ±0
• Strategy: Sell EUR; take profit around 1.1530

CNH/JPY, USD/CNH

• Last Friday's close: USD/CNH 6.4328
• View: USD/CNH range-bound to downside, CNH/JPY higher
• Expected range: USD/CNH 6.3500–6.4650
• Current positions: USD/CNH ± 0.0 CNH/JPY +2.0
• Strategy: CNH/JPY to wait early next week, hold positions
• If USD/JPY retreats, buy dips; if it climbs, ride the ascent

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