#52_Patiently awaiting further clarity

How the forecasts did:

My call for the USD index hit bull’s eye for a second week in row. Other than that, the long AUDUSD trade is 88pips in the green, the long USDCAD trade is 21pips in the red and the long EURJPY & long EURUSD trades were not triggered.

We are experiencing robust growth. Theory suggests an inflationary growth is the last stage of each business cycle. Currently there is no evident inflationary pressure so we need to patiently wait for more data. My main theme for 1H2019, shorting USD, stays valid.

Major take events of last week:

  • USA – China: Negotiations in Washington between Liu He, Mnuchin and Lighthizer were described as candid, specific and fruitful. A written framework was not agreed, but new round of talks have been scheduled to take place in China following the next week’s Chinese Holidays. Trump intends to finalize everything with Xi before the expiration of the 90 days truce, on 2nd of March.
  • Reagan-Gorbachev 1987 Nurclear treaty: Mike Pompeo announced the withdrawal of the USA from the Intermediate-Range Nuclear Forces Treaty, as he threatened to do 60 days ago.
  • USA-Iran-EU-UK: UK, Germany and France are constructing a special financial vehicle for European companies to keep trading with Iran, circumventing the US sanctions.
  • China-Taiwan: No news from the military drills happening around the Taiwan island.
  • Venezuela: Venezuela has $8.8bn foreign reserves (roughly 200tn of gold). Maduro’s regime was cut off from $1.2bn of gold (roughly 27tn) held in Bank Of England and from the cash inflows of the state run company PDVSA. 20tn of gold (roughly $840million) were reportedly loaded in a Russian Boeing 777 at Caracas on Tuesday and 15tn of gold are said to be sold to UAE for Euros. Nothing can be cross checked. The fact of the matter is that gold reached 1317$, +37$, +2.9% since last Friday.
  • Cryptos: Total market cap at $114bn, -5.0% w/w, -86% from January’s $821bn peak.

Major events of next week:

  • China’s New Year Holidays starting from Tuesday

  • Tuesday’s Monetary policy meeting of the Central Bank of Australia (RBA) and Thursday’s monetary meeting of Bank of England.


I am favoring long EURJPY trades, but current levels are not tempting.

Strengths of JPY:

  • the swap agreement signed with China and the trade agreement with EU to come into force within 1st February.
  • Reforms increasing potential GDP: (i)rules promoting the acceptance of foreign workers, increasing women participation and elders participation (ii) incentives for free education programs starting from October 2019 (iii) Production of hydrogen is a defined goal of Japan for 2050 (iv) introduction of two obligatory independent board of directors in Japanese corporations (v) corporate tax reform.

  • Japan has a debt burden of 250% of GDP. The number drops to 152% excluding the debt owned by Japanese Government entities, and drops to 60% excluding the debt owned by the Bank of Japan. Debt to GDP held by the private sector or international holders is only 60%.

  • Japan’s GDP growth is very moderate. Yet, GDP per capita growth stands at 0.65%, which is one of the highest numbers in the developed world.

  • QQE will stay, up until core CPI reads 2.0% in a stable manner. The scheduled consumer’s tax hike in Oct’19 (from 8% to 10%), rules out any possible monetary policy change, before 2020.
  • improving macro readings: unemployment, current account (+20%), bank lending, housing starts,capital spending, industries activity, industrial production, manufacturing PMI

Weaknesses of JPY:

  • deteriorating macro readings: GDP reading (expected to decrease in 2019), inflation, retail sales, household spending,Services PMI, M2, trade balance, monetary base, sentiment readings

Watch / New Releases:

  • Monetary base, Bank lending, current account, average cash earnings, economic sentiment

  • Next Monetary Meeting on 15 March


Take profits at current levels and re-open long AUDUSD trades at 0.7152 and 0.7132


  • China’s Economy: Last week included improving macro releases.
  • The expectations of the Central Bank (RBA) are rosy. A new monetary meeting is expected this week.

  • improving macro readings: GDP, inflation, retail sales, unemployment, M1, service PMI, AIG manufacturing index, household consumption recovered in 3Q18, wage price index,consumer’s sentiment


  • net foreign liabilities are counter intuitively decreasing when AUD depreciates

  • Uncertainty on household consumption due to low income growth, high levels of debt and housing becoming a buyers market, remains. Yet consumer sentiment is improving.
  • Australia is having a minority government and RBA signals no rate hike. Elections are scheduled for May
  • deteriorating macro readings: trade balance, inflation expectations, manufacturing PMI, construction activity, home sales, home loans, current account,company operating profits, decreasing capital expenditure, building approvals, private capital expenditure, private sector credit

Watch / New Releases:

  • Melbourne Institute Inflation gauge, building approvals, retail sales, trade balance, construction index, business confidence

  • Tuesday’s Monetary meeting of the RBA.


Exit the opened long trade when it breaks even and short USDCAD at 1.3171

Strengths of CAD:

  • Oil consumption: So far, the 500million electric cars are only reducing oil demand by 50Kbarrels per day, while total oil demand increase is 1.3Mbarrels per day. Electric cars are not a game changer, as we like to think. On the other hand, Asia is just starting to fly.
  • No downward revision of future oil demand growth has been made in the OPEC’s January report.

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

Weakness of CAD:

  • GDP m/m growth was negative.

  • Another way to look at the recent cabinet shuffle is that we are heading to October’s elections and the uncertainty that it brings.

  • the impact of shale oil in not yet well felt according to Fatih Birol, Executive director of International Energy Agency
  • The bottleneck for Canadian oil delivery remains. I am not convinced that Canada is affected in a significant way by the recent events in Venezuela.
  • oil demand shock driven by maritime industry may happen on 2020 or even later. Latest week on week, US crude oil inventories increased for a second week in a row.
  • deteriorating macro readings: GDP, trade balance, Manufacturing PMI, manufacturing sales, wholesale sales, retail sales

Watch / New Releases:

  • Building permits, unemployment

  • Next Monetary meeting on March 4. I am expecting a rate hike.


Add Short USDindex positions at 95.59

The “length of patience is data dependent”, a quote of J.Powell, Governor of the FED, means that first we need to see inflation numbers, wages, unit labor cost peaking up, before the FED considers more rate hikes (that would sent USD higher and equities lower). In addition to the non existent inflationary pressures, the narrative of slowdown growth, the latest government shutdown and the tighter conditions mute the case for rate hiking.

Strengths of USD – Risk off points:

  • the concurrent increase of equities and gold could potentially be explained by the events in Venezuela.

  • deteriorating macro readings: GDP, current account, retail sales, Non-manufacturing PMI, Service PMI, consumer credit, optimism,consumer confidence, home sales, vehicles sales

Weaknesses of USD -Risk on points

  • The political risk around the world is decreasing. Trade relations between the USA and China are set to be resolved, NATO alliance is moving forward, WTO rules on e-commerce are expected to be updated, a new US-N.Korea summit is being scheduled. The events in Venezuela or the UN vote on Hamas [10 December Report, Issue 44] are only demonstrating the global dividing line and do not trigger fears.

  • FED changed it’s communication and is currently on hold.

  • The US economy grows with no signs of inflation. Inflation, average hourly earnings, employment cost index, manufacturing prices are moving lower.
  • Improving macro readings: Manufacturing PMI, durable goods orders, industrial production, capacity utilization rate, consumer sentiment, construction spending, wholesale inventories moving lower

Watch / New Releases:

  • Services PMI, Non-Manufacturing PMI, unit labor cost, trade balance, consumer credit

  • Next Monetary Meeting on 20 March. No hike is expected.


Long EURUSD 1.1372 (the same entry level, as the previous week) and 1.1322

Strengths of EURUSD:

  • A Deutsche Bank – Commerzbank merger is currently presented as unlikely. Nevertheless it makes sense to position one’s portfolio in favor of a mega merger scenario.
  • The EU-Japan trade deal, set to start on February 1st. New trade deals with Singapore, Australia, New Zealand and Indonesia are being negotiated.
  • Germany and France intend to create the next generation tanks and aircrafts.

  • The “Gillets Jaunes” could potentially become a new political party, participating in the European Elections in May.
  • Fiscal policy is expansionary in most of EU countries
  • improving macro readings: M3, trade balance, unemployment, retail sales, German Trade balance, wage growth, industrial production, economic sentiment, private loans

Weaknesses of EURUSD:

  • ECB’s confidence is based on inflationary pressures from increasing wages and the stronger balance sheet of European banks. Both arguments are not convincing.

  • markets are projecting at least another 2-3 years of re-investment of maturing securities and the first rate hike in 2020

  • Both the German and the Italian Economy reported negative GDP q/q growth.
  • deteriorating macro readings: GDP, inflation, Services PMI,manufacturing PMI, current account, investor confidence,consumer confidence, German factory orders, German industrial production, German retail sales

Watch / New Releases:

  • Service PMI, Retail sales and EU economic forecasts that will be published on Thursday.

  • Next Monetary Meeting on 7 March.


No forecasts for GBP

We are only 8 weeks away from the deadline of Article 50 and the most probable scenario is the extension of the deadline, new elections and/or a new referendum.

A 12 months extension of the March deadline, far beyond the European Elections in May, is likely.

UK parliament voted to send Prime Minister May for new negotiations with Europe as it approved 6 out of 7 of her proposed amendments. Yet, Commission President Jean-Claude Juncker declared that the Withdrawal Agreement will not be renegotiated.


  • UK’s economy is experiencing inflationary pressure. BOE would have hiked rates more aggressively if there was no Brexit drama.

  • improving macro releases: GDP m/m, unemployment, Manufacturing production, M4, average earnings, decreased inflation, lending to individuals, trade balance, construction output


  • the ongoing uncertainty is already evident at macro readings, and could drag on until July.

  • 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 by the Governor of BOE.
  • deteriorating macro releases: Service PMI, consumer’s confidence, retail sales, current account, industrial order expectations, home prices, Construction PMI, Manufacturing PMI

Watch / New Releases:

  • Construction PMI, Services PMI

  • Thursday’s Monetary Meeting of BOE.


Issued by Labis Michalopoulos, CFA




Redistribution is allowed as long as the author and his contact details are referenced.

The snapshot section of each page, contains the latest published figure of major macro releases. It is not a result of now-casting models that would potentially have revealed the effects of current US government shutdown. The coloring of bond yields depends on more than one equation/rule.

My net returns are published in real time at www.forexfactory.com/dxmix I was experiencing an Annual Sharpe Ratio of 1.73 for over 45 months (montly Sharpe ratio above 0.5) . On 24 August, I mistakenly ordered to open a position 10 times bigger that I am used to. My equity level is currently back on track, but my statistics are no longer impressive. My 48 months monthly Sharpe Ratio, that includes the leveraged AUDUSD trade, now stands at 0.30, equal to 1.03 Annual Sharpe Ratio.

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 knowledge 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. 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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