[October 25 to October 29] Trade strategy considering U.S. inflation pressure and economic trends

Last Week's Foreign Exchange Range (Volatility Range)

Last Week's Foreign Exchange Summary

USD/JPY

• Last week's dollar-yen movement started at 1 USD = 114.26 JPY. Early in the week, profit-taking selling dominated, pushing briefly to around 113.90. However, on Wednesday the 20th, as actual demand transactions increased, the dollar-yen recovered to a weekly high of 114.71 ahead of the Tokyo fix (around 9:55). After that, profit-taking remained dominant and the dollar yen gradually weakened, dropping below 114.00 on Thursday and further on Friday, closing at 113.46 with a tepid rebound to 113.46.

EUR/USD

• The euro started at 1 euro = 1.1593 dollars. From Monday European trading hours, euro buying dominated and by Tuesday European hours it rose to as high as 1.1670. Clearing beyond 1.1670 would have suggested a move higher, but selling prevailed. On Thursday there was another attempt to test 1.1670 but not enough to break it, and it eased to close at 1.1647.

USD/CNH

• The yuan started at 1 USD = 6.4309 CNH. From the start of the week, the dollar CNH weakened gradually, breaking clearly below the 6.4250 level that had previously capped, and fell sharply to a weekly low of 6.3685 by late Tuesday. There was some rebound, but the return remained weak; around 6.40 sellers were dominant, and the week ended with a close near 6.3819.

Events of Last Week

18th

• New Zealand Q3 Consumer Price Index +4.9%
• China Q3 GDP +0.2% (slightly weak)
• China September Retail Sales +7.1%
• US September Industrial Production ▼1.3%
• US October NAHB Housing Market Index 80
• August net US securities investment: $91 billion
• Leaders of nine parties across ruling and opposition held a party leaders debate hosted by Japan Journalists Club in Tokyo, discussing COVID-19 measures, economic policy, diplomacy and security, and the administration’s framework.

19th

• Lower house public notice (dissolution) held
• US September Housing Starts 1.555 million (solid)
• US September Building Permits 1.589 million (solid)
• FRB Governor Wallersaid in a speech that if inflation remains high through year-end, “not only tapering but also more aggressive policy action will be needed in 2022,” hinting at a possible rate hike in 2022, with emphasis on monitoring inflation expectations.
• Chinese authorities announced that the number of devices connected to 5G reached 450 million by end-September 2021, up from about 200 million at end-2020, underscoring China’s strong push for 5G.

20th

• Japan September Trade Statistics: -¥6,228 billion
• UK September CPI +3.1%
• South Africa September CPI +5.0%
• Canada September CPI +4.4%
• In the US, Bitcoin futures-based ETFs began trading on the NYSE Arca, operated by ProShares with SEC approval. Investment money expected Bitcoin usage to rise, and Bitcoin prices moved higher.
• FRB's Beige Book noted the US economy expanded at a “slow to modest” pace, though some districts reported slower growth due to supply constraints and concerns about the Delta variant of COVID-19.

21st

• Turkish Central Bank cut policy rate by 2% to 16%
• October Philadelphia Fed Manufacturing Index 23.8 (solid)
• US initial jobless claims 290k (solid)
• US September Leading Economic Index +0.2%
• US September Existing Home Sales 6.29 million (strong)
• Eurozone October Consumer Confidence ▲4.8
• In Melbourne, Australia, COVID-related restrictions on going out were eased. Melbourne’s lockdown had been ongoing since March 2020, totaling 262 days, the longest in the world, according to Australian media.

22nd

• Japan September Nationwide CPI +0.2%
• Eurozone October PMI 54.3
• Russia Central Bank raised policy rate by 0.75% to 7.50%
• US October PMI 57.3
• FRB Chair Jerome Powellsaid in an online discussion that supply constraints and high inflation may linger longer than previously expected, potentially extending into 2022, and emphasized monitoring inflation expectations as a key risk.
• US officials and experts held the 8th “Mt. Fuji Dialogue” (co-hosted by the Japan Center for Economic Research and the Japan Institute of Global Issues) in Tokyo to discuss international issues and strengthen ties among allies in the Indo-Pacific region, including the US, Japan, Australia, and India.
• US stock market closed with Dow up 73 points at 33,677, revisiting its August 16 high for the first time in two months.
• Myanmar’s Ministry of Foreign Affairs issued a statement saying it cannot accept the decision not to allow Commander-in-Chief Min Aung Hlaing to attend the ASEAN summit starting on the 26th.
• EU leaders agreed to consider medium- to long-term measures to ensure stable energy supply, including joint gas procurement and storage rules, to be discussed at the Energy Council on the 26th and revisited at the December summit.
• China's real estate giant Evergrande reportedly transferred the matured interest payment of $83.5 million on a US dollar bond due on the 23rd (Japan time the 24th) to creditors on the 21st, according to Chinese media on the 22nd.
• China’s Household Education Promotion Law was enacted by the Standing Committee of the National People’s Congress on the 23rd to emphasize parental responsibility in child-rearing and to reduce excessive academic pressure and irregularities from online gaming affecting children’s daily rhythms.

Economic Glossary

• GDP = Gross Domestic Product; high growth is viewed positively
• CPI = Consumer Price Index: many developed countries target around 2%
• PCE = Personal Consumption Expenditures: closely tied to consumer prices
• PPI = Producer Price Index: influences CPI
• PMI = Purchasing Manager Index: 50 is the benchmark
• ZEW = Leibniz Centre for European Economic Research: 0 is the benchmark
• NAHB = National Association of Home Builders: 50 is the benchmark
• New York Fed Manufacturing Index: 0 is the benchmark
• Philadelphia Fed Manufacturing Index: 0 is the benchmark
• Richmond Fed Manufacturing Index: 0 is the benchmark
• Chicago Purchasing Managers Index: 50 is the benchmark
• University of Michigan Consumer Sentiment Index: index is 100 for 1966
• S&P/Case-Shiller Home Price Index: “20-Ccity Home Price Index” is commonly used; important for monitoring housing market's impact on the economy
• Housing Permits Index: number of housing contracts that have been signed but not yet closed
• European Consumer Confidence Index: index standardized with averages 2000–2020 at 100
• Eurozone Economic Sentiment Index: index standardized with averages 2000–2020 at 100
• Consumer Confidence Index: index with 1985 = 100
• Japanese Economy Watchers Survey: 50 is the benchmark
• Japanese Corporate Survey: 0 is the benchmark

Key Economic Indicators and Political Events

25th

• NZ Holiday (Labor Day)
• 21:30 Chicago Fed National Activity Index
• 23:30 Dallas Fed Manufacturing Activity Index
• 24:30 US 3-month and 6-month treasury bill auctions

26th

• 08:50 Japan September Corporate Services Price Index
• 22:00 US August Case-Shiller Home Price Index
• 23:00 US September New Home Sales
• 23:00 US October Consumer Confidence Index
• 23:00 Richmond Fed Manufacturing Index for October
• 26:00 US 2-year Treasury Auction

27th

• 05:30 US API Weekly Crude Stock
• 09:30 Australia Q3 Consumer Price Index
• 21:30 US MBA Mortgage Applications Index
• 21:30 US September Durable Goods New Orders
• 30:00 Banco Central do Brasil Selic Rate

28th

• European Central Bank Governing Council Meeting
• BOJ Policy Board Meeting; policy rate announcement following
• 15:30 BOJ Governor Kuroda press conference
• 18:00 Eurozone October Consumer Confidence
• 20:45 European Central Bank Policy Rate
• 21:30 ECB President Lagarde press conference
• 21:30 US Q3 2021 GDP
• 21:30 US previous week's initial jobless claims
• 23:00 US September Housing Permits
• 24:00 US Dallas Fed Manufacturing Index
• 26:00 US 7-year Treasury Auction

29th

• 08:30 Japan September Unemployment Rate
• 08:30 Japan October Tokyo Core CPI
• 08:50 Japan September Industrial Production
• 08:50 Japan September New Housing Starts
• 09:30 Australia September Retail Trade
• 09:30 Australia Q3 Wholesale Price Index
• 18:00 Eurozone October CPI
• 18:00 Eurozone Q3 2021 GDP
• 20:00 Mexico Q3 2021 GDP
• 21:30 Canada August GDP
• 21:30 US Q3 2021 Employment Cost Index
• 21:30 US September Personal Consumption Expenditures (PCE)
• 22:45 October Chicago PMI
• 23:00 October University of Michigan Consumer Confidence Index (Final)
• 25:00 Russia September Unemployment Rate

Next Week and Beyond

• October 30–31: G20 Summit
• October 31: House election results
• November 2–3: FOMC
• December 14–15: FOMC
• December 16: ECB
• December 16–17: BOJ Monetary Policy Meeting
• January 17–21: Davos World Economic Forum

※ From here on (“Last Week's Currency Strength/Weakness,” “Global Macro Environment Overview,” “Chart Analysis,” “This Week's Toda Trading Strategy”) is a paid article

Last Week's Currency Strength

• Last weekDollar Weakness（153/196 countries）
• Oceania, Russia, Norway, etc.Commodity currencies were strong
• On the other hand, fragile emerging market currencies such as Brazil, South Africa, and Turkey were weak
• Cross yen generally saw more profit-taking selling; however tightening-cycle currencies like NZD, NOK, and RUB continued to rise.
• In summary, currency strength is as followsCommodity currencies (raising rates) > Chinese yuan > Japanese yen > Euro > US dollar > Emerging market currencies (South Africa, Turkey, etc.)

Global Macro Environment Overview

• The current major themes are the supply-chain fragmentation due to US-China tensions and a surge in resource prices, which contribute to global inflationary pressure and resulting differences in monetary policy.
• In financial markets, the rise in new COVID-19 cases has largely moved off the thematic focus (especially in advanced economies),with after-COVID being in focusit would seem.
• Last week, U.S. yields rose (U.S. Treasuries sold) while U.S. stocks advanced, and the dollar weakened.
• Notably, the rise in the U.S. 2-year yield was pronounced, closing above 0.45%. This reflects higher U.S. inflation pressures.
• U.S. stocks remained firm, with the Dow Jones Industrial Average hitting a new high. This is attributed to the macro environment showing a strong U.S. economy.
• Thinking about it,the dollar was sold last week, but that seems to be just a correction, and a continued dollar strength scenario seems natural.
• COVID-19 new case trends have inched up a bit (the attached chart Daily New Cases shows a recent 7-day moving average turning up).
• Investors' views on U.S. monetary policy point to tapering at the November 2021 FOMC and rate hikes announced at the June 2022 FOMC (the outlook for rate hikes in the U.S. has moved one FOMC meeting sooner than last month).

Chart Analysis

USD Index (Daily)

• Dollar Index is a broad gauge of 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 a range of 93.4–94.7, currently at the lower end of the range
• From a chart perspective, it might be interesting to pursue dollar buying

USD/JPY Mid-term (Daily)

• Recent range judged to be 112.20–114.40
• Midpoint is 113.30; if it continues to rise, would prefer buying around these levels
• If it dips, watch whether 112.20 can hold; however, I do not expect it to fall to that level

USD/JPY Short-term (Time Frame)

• If it breaks clearly below 113.30, it could run
• RSI suggests being slightly oversold

EUR/USD Mid-term (Daily)

• Range of 1.1530–1.1670
• If it breaks up, target 1.1800

EUR/USD Short-term (Time Frame)

• In a tight range, 1.1620–1.1670
• If dollar strengthens, selling above 1.1650 is favorable

USD/CNH Mid-term (Daily)

• Broadly in a range of 6.35–6.60
• Last week broke below the 6.4250 support and fell sharply
• First target around 6.35
• If it breaks lower, 6.25 (2018 low) is a reference

USD/CNH Short-term (Time Frame)

• Around 6.4000–6.4250 looks like a good level for selling on rallies

This Week's Toda Trading Strategy

Overall Policy

• With the U.S. economy strong and inflationary pressures high, anticipate earlier rate hikes,prioritize buying U.S. dollars
• Expect ongoing monetary easing in Japan,and thus lead with selling the Yen. Even if inflation spreads to Japan, the Bank of Japan would find it difficult to raise rates. Because higher rates would push down bond prices, harming the BoJ which holds about 75% of Japan’s government bonds and private banks.
• Begin by buying the yuanas its absolute interest rate level is high and there remains substantial upside potential.
• Eurohas undergone a major chart breakoutso selling ahead is favored (dollar buying).
• Currency momentum is judged as follows yuan > U.S. dollar > euro > yen

USD/JPY

• Last Friday's close: 113.46
• View: Bullish (short term downside pressure may be strong, but overall bullish)
• Target range: 112.20–114.40
• Current position: USD/JPY +2.0
• Strategy: Start the week with dollar buying until the fixing, then reassess
• If it dips, implement a first stop around 113.00 and look to buy back in the low 112s

EUR/USD, EUR/JPY

• Last Friday's close: EUR/USD 1.1647
• View: EUR/USD flat to down; EUR/JPY flat to up
• Expected range: EUR/USD 1.1530–1.1670
• Current positions: EUR/USD ±0; EUR/JPY ±0
• Strategy: Sell euro, cut losses at 1.1700, take profits around 1.1530

CNH/JPY, USD/CNH

• Last Friday's close: USD/CNH 6.3819
• View: USD/CNH flat to down, CNH/JPY up
• Expected range: USD/CNH 6.2500–6.4000
• Current positions: USD/CNH ± 0.0 CNH/JPY +3.0
• Strategy: On Monday, consider adding to CNH/JPY and monitor
• If pulling back, take a first stop at 17.70; consider buying more around 17.60

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