03 December-Issue 43

Le Dînner de Cons

Last week I correctly called for a risk-on scenario which strarted materializing. I keep favoring the long equities, long risky assets, short USD scenario.

Major events of last week:

  • G-20: The dinner in Argentina, scheduled for today, between Trump and Xi will be decisive. I expect nothing less than USA announcing that they will not increase tariff rates on the 1st of January.

On Tuesday, in an interview with the WSJ, Trump presented himself as being a tariffs man and demonstrated the increased tarriffs revenue pouring into US government as something good and not a rent dragings on the economy. My take is that China would really have to open up, otherwise markets should price in an increased tariff rate of 25% (from the current 10%) and new tariffs on the rest of $267bn of Chinese products.

  • USA-China: New Zealand rejected the proposal for the building of a 5G network from Chinese Hyawei, as did Australia.

  • Governor of the FED, Jerome Powell: Another dinner, on Wednesday 28th, at the New York Economic Club, sparked the risk-on sentiment when Powell said that we are just below the neutral rate.

  • Ukraine-Russia: Three (3) Ukrainian military boats were seized, 24 Ukrainian sailors were detained and commercial shipping was blocked by Russia. Ukraine declared martial law and asked NATO for help and particularly Germany. Russians downplayed the incident, arguing that it was an organized provocation by Ukraine’s President Petro Poroshenko, as Ukraine is heading to the March 2019 presidential elections. The same argument can be made for Putin’s falling popularity (from 74% last year to now 58%) following a pension reform. The EU’s reaction was verbal. Trump-Putin meeting in G-20 was canceled.

  • UK: EU leaders have ratified the draft deal and it is UK’s parliament turn next Tuesday (December 11) to vote.

  • Taiwan: People moved in favor of the the pro-China party in the latest elections.

  • France: Protests in Paris against fuel tax hikes and demanding minimum wage increase.

  • Cryptos: Total market cap contraction continues to $130bn, -7% w/w, -84% from January’s $821bn peak. Contrary to crypto’s falling, as of Monday 26th of November, Ohio state started accepting bitcoins for business taxes.

Major events of next week:

  • Monetary Policy meeting of the Bank of Australia (RBA) on Tuesday and the Bank of Canada (BOC) on Wednesday

  • ΟPEC’s decision time in Vienna, on Thursday


No forecast for EURJPY

Snapshot was mixed:

  • Core CPI (=BOJ’s compass) at 1.0% (2.0% target,expects 1.2~1.3% within 2018) CPI increased to 1.4%, BOJ rate at -0.1%

  • GDP at 0.30% annual, -0.3% q/q, 10Y Government bonds yield at 0.09%(-1bps w/w) vs BOJ’s target of 0.00±0.20% level

  • Unemployment increased to 2.4%

Strengths of JPY:

  • Japan voted in favor of easier immigration, helping the potential labor supply

  • The new agreement signed with China

  • Abe’s win at the Liberal Party elections provides stability.

  • 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: inflation, retail sales, housing starts, industrial production, capital spending and sentiment readings

Weaknesses of JPY:

  • deteriorating macro readings: GDP reading (expected to decrease in 2019), unemployment, bank lending, housing spending, manufacturing PMI,Services PMI, M2,trade balance and current account, all industries activity


  • Tuesday’s Monetary Base and the yield of the 10y Bond Auction

  • Friday’s Household spending

  • Next Monetary Meeting on 20 December


I am favoring short USDCAD trades, but first I want to see the communication of OPEC’s meeting on Thursday and oil prices rebounding.

Snapshot deteriorated.

  • Inflation at 2.4% (vs 2.5% target, BOC expects 2.0% within 1Q19), BOC rate at 1.75% (4 hikes in the cycle, 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 at 0.1%, 10Y Government bonds yield at 2.27% (-8bps w/w).

  • Unemployment at 5.8%

Strengths of CAD:

  • Decisions that will help oil prices move higher are expected at the upcomimg meeting of OPEC on Thurday in Vienna

  • investment indicator rebounded to a high level, following the recent USMCA deal

  • improving macro readings: current account, unemployment, trade balance, building permits, Ivey PMI (index constructed from survey of purchase managers), manufacturing sales, foreign securities purchases, corporate profits

Weakness of CAD:

  • oil prices failed to find support at the technically significant level of 64$. Demand growth is slowing and US inventory levels rised for the 10th week in a row.

  • oil demand shock driven by maritime industry may happen on 2020 or even later.

  • deteriorating macro readings: GDP, Manufacturing PMI, wholesale sales and retail sales


  • Monday’s Manufacturing PMI

  • Wedneday’s Monetary Meeting. No rate hike is expected

  • Thursday’s OPEC meeting in Vienna

  • Thurday’s Trade Balance and Friday’s unemployment rate


I keep my long AUDUSD positions targeting 0.7413

AUD is currently moved by the development of China-USA trade talks. I am positioning in favor of a delaying of further tarrif increases and an aggreed timeline for further negotiations that would send the pair higher.

Snapshot unchanged:

  • Inflation at 1.9% (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 updated expectation to 3.5% within 2018 and 2019), 10y Bond yields at 2.59%(-6bps w/w, +0bps w/w yield spread with the US 10y bonds)

  • Unemployment at 5.0% (expected to reach 4.75% by the end of 2020)


  • RBA has not commited a rate hike in the cycle. On the other hand, a rate hike is possible within April 2019 and Australian banks are already increasing their lending rates.

  • I expect Australian Household consumption to increase

  • improving macro readings: GDP, employment change, household consumption recovered in 3Q18, trade balance, consumer sentiment, wage price index


  • Australia is having a minority government since they lost their one-seat majority on the 20th October’s by elections. On Tuesday 27 November, another Liberal MP, Julia Banks, quited and now stands as independent. She will not support a no confidence vote.

  • Latest macro releases do not confirm my expectations for a stronger household consumption

  • deteriorating macro readings: inflation expectations, home loans, construction activity, home sales, current account,company operating profits, decreasing capital expenditure, building approvals, retail sales, private capital expediture


  • Monday’s M1 and building approvals

  • Tuesday’s Monetary Meeting and Current Account. No rate hike is expected but I would search for any comments favoring rate hike on April

  • Wednesday’s GDP, Thurday’s retail sales and Trade Balance are expected to stop AUD from strenghthening any further.



I keep my ground and favor short USD positions

Powel comments at the Economic Club of New York Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economywere enough to send USD lower as they should be compared with his October 3rd comments “We may go past neutral, but we’re a long way from neutral at this point, probably”. In addition, all of his interest rate hiking comments were in past tense.

Snapshot was improved:

  • Core PCE (=FED’s inflation compass) decreased to 1.8%, CPI at 2.5%, FED ‘s rate at 2.25% and expected to reach 3.1% within the cycle. FED’s view of long run rate at 2.9%

  • GDP at 3.0%y/y (expected to fall to 2.9%), 3.5% q/q, 10y Bond yields at 2.99%(-6bps w/w)

  • Unemployment at 3.7%

Strengths of USD – Risk off points:

  • deteriorating macro readings: Manufacturing PMI, Non-manufacturing PMI, home sales, consumer confidence

Weaknesses of USD -Risk on points:

  • Equties managed to rebound and are now testing the 200Day Moving Average level

  • Stronger USD does not help neither equities nor US economy

  • inflation is not worrying. Latest core PCE reading fell.

  • risk-on news like a EU-UK negotiations concluding, consensus with China, and a modus vivendi between EU and the Italian government may simultaneously hit the headlines sending USD lower.

  • Improving macro readings : Services PMI, durable goods orders, retail sales, personal spending and personal income increase


  • Monday’s Manufacturing PMI, Construction spending and Vehicle sales. All numbers are expected to be possitive, sending equities higher and USD lower

  • Wednesday’s unit labor cost, that will confirm that inflation is not an issue

  • Wednesday’s Non-Manufacturing PMI, Thursday’s trade balance

  • Friday’s Unemployment and Consumer Credit

  • Next Monetary Meeting on 19 December. The propability of a rate hike is almost certain at 82.7% from 74.1% one week ago.



I would short EURUSD at 1.1470

Snapshot deteriorated:

  • Annual CPI decreased to 2.0%, core CPI (=ECB’s compass) decreased to 1.0%, ECB ‘s rate at 0.00%

  • GDP at 1.7%(OPEC ‘s expectations reduced further to 1.9%), 10y Bond yields of EFSF at -0.3746%(+9bps w/w), 10y German Bond yields at 0.3134% (-3bps w/w), 10y Italian Bond yield at 3.2341% (-18bps w/w, +43bps in 10 weeks), 10y Greek Bonds yields at 4.2755% (-28bps w/w)

  • Unemployment at 8.1%

Strengths of EUR/USD:

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

  • improving macro readings: M3, wage growth, German factory orders, industrial production

Weaknesses of EURUSD:

  • The decreased inflation may push ECB to extend the QE program beyond December 2018

  • The German Economy reported negative GDP q/q growth

  • The Italian budget drama is prolonged. The most probable scenario is that Italy will be placed in the Excessive Debt Procedure by EU and any change of Italian budget will be made after the European elections in May 2019

  • Structural reforms, like the European Deposit Insurance Scheme, the creation of a macroeconomic shock absorber mechanism that would issue short term loans to European governments that are having troubles, could further be postponed

  • EU economy is loosing momentum and the automobile sector is having troubles

  • 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, as I had noted at previous reports)

  • deteriorating macro readings: GDP, inflation, Manufacturing PMI, Services PMI, retail sales, investor confidence and economic sentiment, German Trade balance, European trade balance, current account


  • Monday’s Manufacturing PMI, Wednesday’s Service PMI and Retail Sales, Thursday’s German Factory orders and Friday’s German industrial production.

  • Next Monetary Meeting on 13 December


No forecast for GBP

EU leaders have ratified the draft deal and it is UK’s parliament turn next Tuesday (December 11) to vote.

Bloomberg surveyed banks and asset managers and concluded that GBPUSD would test the 1.25 level in case the agreement is rejected (which has a 55% chanse of happening) and would test the 1.34 level in case the agreement is aproved.

You may watch this 13minutes video to get a certain impression that a rejection is about to happen https://www.youtube.com/watch?v=FOyX5FGT8zc

Snapshot unchanged:

  • Inflation at 2.4% (vs 2.0% target), BOE ‘s rate at 0.75%

  • GDP at 1.5% (vs 1.75% BOE’s expectations and 1.3% decreased OPEC’s expectations), 10y Bond yields at 1.36% (-2bps w/w)

  • Unemployment at 4.1%


  • during the latest press conference of BOE, it was revealed that without Brexit uncertainty, BOE would have think more of rising rates

  • positive macro releases: M4,Construction PMI, average earnings, decreased actual inflation, lending to individuals, trade balance


  • Carney’s, the governor of BOE, argued that there will be a supply shock in case of a disorderly Brexit. 8% drop in GDP, a 25% decline in the pound, a 30% drop in home prices and 5.5% interest rate to help GBP to recover were the presented numbers.

  • Even if UK parliament approves the draft deal, a discount for uncertainty remains as future trade relations will be defined later.

  • Negative macro releases: GDP m/m, unemployment, Service PMI, Manufacturing production, Manufacturing PMI, construction output, consumer’s confidence, current account, industrial order expectations, home prices, retail sales


  • MPs intentions as we are heading to December 11.

  • Monday’s Manufacturing PMI, Tuesday’s retail and Construction PMI, Wednesday’s Services PMI and Friday’s consumer inflation expectations.

  • Next Monetary Meeting on 20 December


Issued by Labis Michalopoulos, CFA




To help speed reading green is used for numbers that have a risk on effect, red is used for numbers with risk off effect, blue is used for new arguments, forecasts are underlined and found at the beginning of each page.

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, for over 45 months. 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.The degree of confidence in our forecasts gets smaller, the more knoledge we posses for each security.

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.

This report is for information purposes only and does not constitute an offer or invitation to anyone to invest or trade and has not been prepared in connection with any such offer.

Any research in this document has been produced 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.

Reliance upon information in this material is at the sole discretion of the reader.

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