Trade strategy considering the Ukraine situation and U.S. monetary policy [February 14–February 18]

Last Week's Exchange Rate Range (Volatility Range)

Last Week's Currency Market Summary

USD/JPY

• Last week's USD/JPY began at 115.21. As risk-taking gradually picked up early in the week, dollar buying remained dominant and the USD/JPY trended higher.On Thursday, expectations for the Bank of Japan's fixed-rate operation (unlimited long-term rate guided operation) and strong U.S. January CPI (inflation pressure) propelled USD/JPY to near the year-to-date high of 116.33. By the weekend, with position adjustments taking precedence, the level gradually eased, and amid Ukraine-related tensions, the pair fell sharply to around 115.0, closing at 115.40.

EUR/USD

• The euro began at 1.1449 per euro. Through Thursday, muted moves prevailed, but after the strong U.S. January CPI, the pair fell to around 1.1380 and then briefly touched 1.1495, reflecting a volatile move from the year's high. Over the weekend, risk-off sentiment and cross-yen selling pushed the pair lower, closing at 1.1351.

USD/CNH

• The yuan started at 6.3607 per dollar. After the Spring Festival, dollar buying strengthened, pushing to 6.3769, but later dollar-selling and yuan-buying tendencies were modestly in favor. The week saw little overall volatility, ending at 6.3664.

Events of the Week

7th

• China January Caixin Services PMI 51.4
• Japan December Leading Economic Index 104.3 Coincident Index 92.6
• Germany December industrial production ▼0.3%
• French President Macron said that the true intention of Russia, which is believed to be planning a new invasion of Ukraine, is to coexist with NATO and the EU,

8th

• Japan December International Balance/Current Account ▼3,708 billion yen
• U.S. December Trade Balance ▼$8.07 billion
• Peru's President Castillo appointed Aníbal Torres as Justice and Human Rights Minister. This marks the fourth prime minister since taking office in July 2021.
• Romania's Minister of Defense Duinck said the first wave of U.S. forces had arrived.
• Central Asian countries including Uzbekistan are deciding on or studying the introduction of nuclear power plants. The aging Soviet-era integrated power grid and insufficient current capacity suggest continued reliance on Russian technology, potentially increasing Russia's influence in Central Asia.

9th

• Japan January M2 money stock +3.6%
• Germany December Trade Balance +€0.7 billion
• U.S. December Wholesale Inventory (MoM) +0.2%

10th

• Japan January Domestic Corporate Goods Price Index +0.6%
• U.S. January CPI +7.5% (very high inflation pressure)
• Initial jobless claims for previous week: 223,000
• Peru's central bank raises policy rate by 0.50% to 3.50% at the October 10 meeting. The rate hike is the seventh consecutivetime.
• Russia-Belarus joint military exercises began on the 10th inside Belarus. The distance from the southern border of Belarus to Kyiv is only about 100 kilometers.
• High-level discussions among Ukraine, Germany, France, and Russia in Berlin aim to ease tensions and pursue peace in the eastern conflict that began in 2014 with pro-Russian forces.
• BOJ announced an unscheduled government bond buying operation to be conducted on the 14th, with prices set to absorb all submitted bids at a yield of 0.25% for new 10-year JGBs. This marks the first time since July 2018 that such a targeted operation is used.

11th

• IEA Oil Market Report for February
• UK Q4 2021 GDP +1.0%
• UK December Industrial Production +0.3%
• U.S. February University of Michigan Consumer Sentiment Preliminary 61.7
• White House National Security Advisor Sullivan said Russia’s invasion of Ukraine could occur at any time and urged Americans in the country to evacuate within 48 hours.
• ECB President Lagarde told a German media interview released on the 11th that easing will be "gradual." Markets have priced in removal of negative rates by year-end, and long-term rates have risen. Lagarde warned that rushing could weaken the economic recovery.
• President Biden and President Macron will discuss Ukraine and related issues with President Putin by phone.

Economic Terms Glossary

• GDP = Gross Domestic Product: high growth is favorable
• CPI = Consumer Price Index: many advanced economies target 2%
• PCE = Personal Consumption Expenditures: correlates closely 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 baseline
• Phila Fed Manufacturing Index: 0 is baseline
• Richmond Fed Manufacturing Index: 0 is baseline
• Chicago PMI: 50 is baseline
• University of Michigan Consumer Sentiment Index: indexed with 1966 = 100
• S&P/ Case-Shiller Home Price Indices: "20-Ccity Composite" is commonly used; important for housing market trends
• Housing Pending/Sales Index: measures contracts signed but not yet closed
• European Consumer Confidence Index: 2000-2020 average = 100
• European Economic Sentiment Index: 2000-2020 average = 100
• Consumer Confidence Index: indexed with 1985 = 100
• Japan's Economic Watchers' Survey: 50 is baseline
• Japanese Corporate Goods Price Index: baseline 0

Key Economic Indicators and Political Events

14th

• 25:15 Lagarde, ECB President, remarks (European Parliament)

15th

• Germany–Russia summit (Moscow)
• 08:50 Japan Q4 2021 Real GDP
• 09:30 Reserve Bank of Australia monetary policy meeting minutes
• 13:30 Japan December Industrial Production
• 13:30 Japan December Capacity Utilization
• 19:00 Eurozone February ZEW Economic Sentiment
• 19:00 Eurozone December Trade Balance
• 22:30 U.S. January PPI
• 22:30 U.S. February New York Fed Manufacturing Index

16th

• NATO Defense Ministers Meeting (through 17th)
• ASEAN Foreign Ministers Meeting (Phnom Penh, through 17th)
• 10:30 China January CPI
• 10:30 China January PPI
• 16:00 United Kingdom January CPI
• 17:00 South Africa January CPI
• 19:00 Eurozone December Industrial Production
• 22:30 U.S. January Retail Trade
• 23:15 U.S. January Industrial Production
• 28:00 FOMC Minutes

17th

• Munich Security Conference
• 08:50 Japan January Trade Statistics
• 08:50 December Machinery Orders
• 09:30 Australia January Employment
• 20:00 Turkey Central Bank policy announcement
• 22:30 U.S. Previous Week Initial Jobless Claims
• 22:30 U.S. January Housing Starts
• 22:30 U.S. January Building Permits
• 22:30 U.S. February Philadelphia Fed Manufacturing Index

18th

• 08:30 Japan January nationwide CPI
• 16:00 Sweden January CPI
• 24:00 U.S. January Existing Home Sales

Beyond Next Week

• March 5: National People's Congress (China)
• March 9: South Korea Presidential Election results
• March 10: ECB meeting
• March 16: FOMC (with economic projections)
• March 18: BOJ Policy Meeting
• April 14: ECB
• April 28: BOJ Policy Meeting (outlook for economy and prices)
• May 4: FOMC
• June 9: ECB
• June 15: FOMC (with projections)
• June 17: BOJ Policy Meeting
• July 21: BOJ Policy Meeting (outlook for economy and prices)
• July 21: ECB
• July 27: FOMC
• September 8: ECB
• September 21: FOMC (with projections)
• September 22: BOJ Policy Meeting
• October 27: ECB
• October 28: BOJ Policy Meeting (outlook for economy and prices)
• November 2: FOMC
• November 8: U.S. midterm elections
• December 14: FOMC (with projections)
• December 15: ECB
• December 20: BOJ Policy Meeting

Last Week's Currency Strength

• Overall last week showed a dollar selling bias (122/196 countries),mixed movements when tied to the Ukraine situation.
• First and foremost, the European currencies fell, selling across the board as Ukraine tensions intensified.
• On the other hand, commodity-poor geopolitical risk currencies such as Brazil, South Africa, and Australia were bought, suggesting that investment cooling isn’t the case.
• In summary, last week's currency strength was as followsEmerging market currencies such as South Africa ＞ CNY ＞ USD ＞ JPY ＞ EUR and European currencies

Global Macro Environment (Updated)

• The market participants' focus remains on two things: the Ukraine situation and U.S. Federal Reserve policy.
• Perhaps due to the Winter Olympics, the first half of the week had a hopeful mood, butin the second half risk-off sentiments grew as Ukraine tensions intensified.
• Specifically, the S&P 500恐怖指数 (Fear Gauge) rose from 23.22 at the week's start to 27.36 at the end
• Moreover, following the strong U.S. January CPI release,expectations for a U.S. rate hike rose rapidly during the week.
• In the interest-rate futures market, there is a 94% probability of a 0.50% rate hike in March in the U.S.
• Regarding Ukraine, considering talks among Eurasian continent leaders and officials, it does not look like a sudden military invasion will begin.However, the risk if it does start is immense, and it is necessary to consider that various risk assets could fall.
• On the other hand, the risk can be a gateway to opportunity;
• As noted later,with Covid-19 impacts calming somewhat, if the Ukraine situation stabilizes, there is a potential for gradual risk-on sentiment.
• Additionally, Japanese monetary policy has not been much in focus, but given inflation, attention is likely to increase, so we should monitor carefully
• We will continue to watch the U.S. Democratic Party (Build Back Better) bill as well

Global Macro Environment (Covid-19)

• Covid-19 impact is somewhat easing (risk-on factor)
• The trend in new Covid cases (7-day moving average) shows a plateau (attached chart Daily New Cases)
• The trend in new deaths from Covid (7-day moving average) has also turned downward (attached chart Daily New Cases)

Chart Analysis

USD Index (Daily)

• Dollar Index indicates overall strength of the dollar (basket composition: EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%, CHF 3.6%)
• Last week found support at 95.50 and rebounded modestly

USD/JPY Mid-Term (Daily)

• On a daily basis, the upside continues to be tested
• RSI shows warmth is maintained, suggesting a steady rise is possible

USD/JPY Short-Term (Hourly)

• Moving along the green trendline
• Ukraine risk requires caution, but the current level could become a dip-buying opportunity

EUR/USD Mid-Term (Daily)

• Long-standing downtrend (green line) has been clearly broken to the upside
• However, whether a new uptrend has truly started is debatable; a bit of patience may be prudent

EUR/USD Short-Term (Hourly)

• Recent highs near 1.1480 serve as resistance
• Ukraine risk requires attention, but levels look more favorable for buying

USD/CNH Mid-Term (Daily)

• Downward trend continues
• However, since late last year the same levels have persisted, suggesting upside momentum is waning

USD/CNH Short-Term (Hourly)

• Range-bound around 6.3500–6.3790

This Week's Toda Trading Strategy

Overall Policy

• Maintain a dip-buying approach for the dollar
• Sell the yen first
• Limit risk on assets while entering on the buy side

USD/JPY

• Last Friday close: 115.40
• View: range-bound to higher
• Expected range: 114.50–116.50
• Current position: USD/JPY ± 0.0
• Monitor the dollar index movement and the USD/JPY trendline (hourly, green) and support for a dip-buying approach

EUR/USD, EUR/JPY

• Last Friday close: EUR/USD 1.1351
• View: EUR/USD flat; EUR/JPY flat to higher
• Expected range: EUR/USD 1.1370–1.1530
• Current positions: EUR/USD ± 0; EUR/JPY ± 0
• No clear trend yet; hold off

CNH/JPY, USD/CNH

• Last Friday close: USD/CNH 6.3664
• View: USD/CNH flat, CNH/JPY flat to higher
• Expected range: USD/CNH 6.2500–6.4000
• Current positions: USD/CNH ± 0.0; CNH/JPY ± 0.0
• No clear trend yet; hold off

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