01 October-Issue 34

FED cleared the path-Italian budget agreed

Major last week’s events:

  • Oil market: On the weekend’s OPEC+ meeting no production increase agreed. Yet, on Thursday, Reuters reported that Saudis will quietly increase production, and CNBC was more precise to report a 0.5 Mbarrels per day increase. Remember that when USA pulled away from Iran agreement (on May), markets were pricing that they will only miss 0.4MBarrels per day (vs the 1.5MB/day reduction that happened when Obama initially imposed sanctions on Iran). Now markets expect to loose 1.3MB/day production from Iran. Meanwhile, the EU created a legal entity to maintain business with Iran and  Netanyahu (Israeli PM) claimed to have found 15 containers with nuclear-related material in Tehran (Iran).
  • Tariffs’ front: China rejected entering a new round of negotiations with USA
  • NAFTA: The 1st of October deadline to reach a deal will most likely not be met. Mexico insists that a deal needs to remain trilateral
  • US Transformation: Leaders spontaneously laughed at Trump as he was addressing United Nations and arguing that his administration is the most successful one, in the history of USA.  “We reject the ideology of globalism, and we embrace the doctrine of patriotism.” “USA will not participate in the new Global Compact on Migration” were some other parts of his speech worth-noting
  • Argentina: The central bank governor resigned and IMF increased the agreed bail outfor Argentina to stand at $57bn (from $50bn)
  • FED: Signaled more rate hikes to come. The question now becomes what will trigger the 25bps rate increase per quarter to stop.
  • Cryptos: Total market cap at $219bn, -3% w/w, -74% from January’s $821bn peak, +17% from the $186bn low two weeks ago.

Major next week’s events:

  • Sunday’s referendum at FYROM. There are reports of Russian intervention via fake accounts on Facebook and Twitter so that the proposed name change (to be called North Macedonia) is rejected. Polls are giving an expected participation rate of 57%

  • Tuesday’s Monetary Meeting of RBA (Australian Central Bank)

  • Friday’s announcement of the Italian Budget.

  • Weekend’s Brazilian Elections.

  • The whole week is a Chinese holiday.


I am expecting one more week of stronger USDJPY and weaker EURJPY.

My last entry level was not triggered. I would short EUR/JPY at 132.32

Snapshot improved:

  • Core CPI (=BOJ’s compass) at 0.9% (vs 2.0% target and BOJ’s members’ expectation of 1.2~1.3% within 2018), BOJ rate at -0.1%
  • GDP at 1.00% annual, 0.7% q/q, 10Y Government bonds yield at 0.13% (+0bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment fell at 2.4%

Strengths of JPY:

  • Abe’s win at the Liberal Party elections provide stability. An expected cabinet’s reshuffle could further boost Japanese equities.
  • QQE will stay, up until core CPI reads 2.0% in a stable manner. The scheduled VAT hike in Oct’19, rules out any possible monetary policy change, before 2020.
  • improving macro readings: GDP reading, inflation, unemployment, bank lending, retail sales, housing market, Manufacturing PMI capital spending and sentiment readings

Weaknesses of JPY:

  • deteriorating macro readings: Services PMI, trade balance and current account


  • No market mover expected

  • Monday’s Manufacturing PMI, Tuesday’s Monetary base and Consumer confidence, Friday’s household spending and leading indicators. All releases are expected to be improved and would favor short EUR/JPY trade.

  • Next Monetary Meeting on 31 October


I am entering short USD/CAD at 1.3150 targeting 1.2690

Snapshot improved.

  • Inflation at 2.8% (vs 2.5% target, BOC expects 2.0% within 1Q19), BOC rate at 1.50% (4 hikes so far, neutral rate according to BOC within 2.5%~3.5% range).
  • GDP at 1.9% (vs. BOC expectations of 2.0% in 2018 and long term potential of 1.8%), GDP m/m increased to 0.2%, 10Y Government bonds yield at 2.43% (+0bps w/w).
  • Unemployment at 6.0%

Strengths of CAD:

  • NAFTA. I am expecting a CAD rally once a deal is reached.
  • next monetary meeting on the 24th of October may include a rate hike
  • at the OPEC+ meeting, no oil production increase agreed. Oil prices are increasing and new highs are expected. Apart from the lower supply due to Iran sanctions, I am expecting a demand shock on January ’19 as marine-time industry would start asking for refined oil to be used at all ships traveling in European ports.
  • improving macro readings: GDP, foreign securities purchases

Weakness of CAD:

  • more good news needed for the 200Day Moving Average level to be crossed south

  • deteriorating macro readings: unemployment (new release this week, housing market, wholesale sales, and retail sales


  • Any news on NAFTA negotiations

  • Monday’s Manufacturing PMI, Friday’s Unemployment and Trade Balance

  • Next Monetary Meeting on 24 October


I am long AUDUSD. My reasoning is that it all boils down to Australian Household consumption. Low numbers are contained, any big number will shot AUD higher

Snapshot unchanged:

  • Inflation at 2.1% (expected at 1.75% later in 2018 and then higher in 2019), RBA ‘s rate at 1.50% (no hike so far)
  • GDP at 3.4% (RBA expects more than 3.0% within 2018 and 2019), 10y Bond yields at 2.67% (-3 bps w/w)
  • Unemployment at 5.3% (expected to reach 5.0% by 2020)


  • The Australian political drama is over. The 20th of October snap election for the seat of the former PM, is not expected to result into a new government.
  • improving macro readings: GDP, employment change, household consumption recovered in 3Q18


  • market participants expect the RBA’s rate to remain unchanged and not follow the rate hike schedule of other Central Banks
  • a significant 50 Day Moving Average level (0.7300) needs to be crossed
  • deteriorating macro readings:trade balance, current account,company operating profits, decreasing capital expenditure, building approvals, home sales, confidence and consumer sentiment


  • Monday is a holiday

  • Tuesday’s Monetary Meeting. No hike is expected.

  • Wednesday’s building approvals, expected to boost long AUDUSD trades

  • Thursday’s Trade balance. A number above1.50Bn AUD favors my AUDUSD trade

  • Friday’s retail sales.



A 25bps rate hike per quarter is the norm and now the question at the latest Q&A session of FOMC meeting, became what would trigger the stopping of tightening. Slowing down of job growth, a sharpe increase of wages or inflation, or a decline of headline GDP growth was the answer.

I would short EURUSD at 1.1830

Snapshot unchanged:

  • Core PCE (=FED’s inflation compass) at 2.0%, CPI at 2.7%, FED ‘s rate increased to 2.25% (IOER) and expected to reach 3.1% within the cycle. FED’s view of long run rate at 2.9%
  • GDP at 2.9%y/y, 4.2% q/q, 10y Bond yields at 3.06% (-1 bps w/w)
  • Unemployment at 3.9% (vs natural rate of unemployment of 4.5%), FED expects 3.6% unemployment in 4Q18 and 3.5% for 2019 and 2020.

Points to be considered

  • inflation is not worrying. Latest releases showed decreasing numbers, latest core PCE index decreased to 0.0% m/m, labor cost data decreased & Trump canceled a 2.1% wage raise for federal employees
  • business inventories rising and retail sales falling are signaling a downtrend. Yet these are the only readings that are pointing to equities falling and USD rising as a safe haven

  • two new narratives capable of boosting US markets for another semester are in the making (a) indexing inflation so that long term capital gains are taxed lower (b) publishing earnings every 6 months instead of every 3 months can bring creative accounting. On top 3Q earnings are once again expected higher than 20%
  • GDP, Manufacturing PMI, Non-manufacturing PMI, durable goods orders are all recording big numbers.

  • risk-on news like a NAFTA deal, EU-UK negotiations concluding, consensus with China, may simultaneously hit the headlines sending USD lower. None of these news is happening any time soon


  • Monday’s Manufacturing PMI and Total Vehicles Sales. The strong outlook needs to be verified

  • Wednesday’s Service PMI and Non-Manufacturing PMI

  • Friday’s non-farm employment change and average earnings

  • Next Monetary meeting on November 8, following the Midterm Elections.



I keep my short EUR/USD bias for another 2 weeks. I am entering short at 1.1830

Snapshot mixed:

  • Annual CPI increased to 2.1%, core CPI (=ECB’s compass) decreased to 0.9%, ECB ‘s rate at 0.00%
  • GDP at 2.1% growth (OPEC reduced expectations to 2.0%), 10y Bond yields of EFSF at -0.35% (+1bps w/w), 10y German Bond yields at 0.47% (+1bps w/w), 10y Italian Bond yield at 3.14% (+30bps w/w), 10y Greek Bonds yields at 4.18 (+11bps w/w, at the fifth week following bailout protection)
  • Unemployment at 8.2%

Strengths of EUR/USD:

  • Announced Italian budget was not that bad. Last year the budget targeted at a deficit 2.3% of GDP. A fiscally responsible budget was supposed to target a smaller than 2.0% deficit, the actual proposed budget was a 2.4% deficit and Finance Minister Tria stays in the cabinet. In my book, markets overreacted on Friday. The eventual pricing of Italian political risk needs to become lower.

  • excluding Italy, fiscal policies will not be as neutral as previously expected.

  • improving macro readings: risk-on sentiment, improvement of labor market and wage growth, private loans, decreasing unemployment

Weaknesses of EUR/USD:

  • we are only two weeks away from the Bavarian elections

  • bond yields of European periphery increased (yet I believe that they are set to decline once again). On October 26 S&P credit agency will rate Italian debt

  • the different stages of monetary policy between EU and US, can only be simulated with another dip of EUR/USD in mid December. (the expected dip on late September has already happened)

  • deteriorating macro readings: current account, M3, retail sales, trade balance, manufacturing PMI, investor confidence


  • Monday’s Manufacturing PMI and Unemployment rate

  • Wednesday’s Services PMI and Retail sales are expected higher

  • Friday’s German Factory Orders are expected higher

  • Next Monetary Meeting on 25 October.


I will wait to see the outcome of the Conservatives Party Conference that has already started.

I am thinking of entering short GBPUSD at 1.3268

Snapshot deteriorated:

  • Inflation at 2.7% (vs 2.0% target), BOE ‘s rate at 0.75%
  • GDP at 1.2% growth (vs 1.75% BOE’s expectations and 1.3% decreased OPEC’s expectations), 10y Bond yields at 1.57% (+2bps w/w)
  • Unemployment at 4.0%


  • positive macro releases: Services PMI, M4, consumer’s inflation expectations increased


  • inflation is peaking up again while BOE has only signaled 3 hikes for the next 3 years. It will be a very hard task to fight inflation and GBP weakening at the same time
  • a no deal with EU is possible. In this case UK would be able to be competitive to EU regulatory wise, but would loose tax revenues from the decrease of financial activity in the City.
  • the no deal scenario has already been characterized as bad outcome by Mark Corney (Governor of BOE) and has been quantified to be equal to a £80bn in public finance by Philip Hammond (Head of Treasury)
  • Negative macro releases: consumer’s confidence, current account, average earnings, industrial order expectations, manufacturing and construction production and PMI


  • UK politics and negotiation process.

  • Monday’s Manufacturing PMI and M4, Tuesday’s Construction PMI and Wednesday’s Services PMI. No release is expected to surprise the markets with increased numbers.

  • Next Monetary Meeting on 1st of November.



Issued by Labis Michalopoulos, CFA




Readers checking the returns at www.forexfactory.com/dxmix will notice a leveraged trade on AUDUSD opened on 24 August that ruined the hard earned statistics of 0.5 montly Sharpe Ratio. I mistakenly ordered to open a position 10 times bigger than I am used to, and my reaction to the mistake was a series of new wrong actions.

This material is for Qualified Investors and Professional Clients only and should not be relied upon by any other persons.

Past performance or past accurate forecasts is not a guide to future performance and the accuracy of future forecasts and should not be the sole factor of consideration. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to go up and down. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

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Any research in this document has acted by Labis Michalopoulos, CFA for his own purpose. The views expressed do not constitute investment or any other advice and are subject to change. The author has an interest in the currency pairs, indexes and any other security disclosed in this report as he is an active trader.

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