Report for 04 June-08June

Paddling-Staring-Committing

Exceptionally good results for last week’s offered ideas. Only two ideas [to search going long AUDUSD at 0.7474 level and to enter long EURUSD at Tuesday’s European opening], both hit bulls-eye and ended my last report’s expressed frustration, when I was communicating my regret for having jumped off early, instead of curving/staying in the winning long safe havens trades (i.e. long USD, long JPY).

Major last week’s events:

• Korea: The 12^th of June N. Korea-USA summit is still on and there is a chance that both S. Korea would participate. Denuclearization on the one hand and the removing of 28K US troops from Korean peninsula on the other, is at stakes.
• Tariffs front: The exceptions of EU, Canada and Mexico from imposed steel and aluminum tariffs have not been renewed, as none accepted the proposed quotas in negotiations with US Commerce Secretary Wilbur Ross. Canada and EU filled challenges with the WTO (World Trade Organization) and plan to retaliate on US orange juice, whiskey, blue jeans and Harley-Davidson motorcycles

• Iran Deal: Nothing new under my radar

• Italy: Week began with President Mattarella refusing to accept an anti-euro Finance Minister and Italian government yields rising above 3.00%. Yet, the week ended with the formation of a new government and bond yields decrease.

• Cryptos: Total market cap at 341B$, almost the same level as previous week

Major next week events:

• Meeting of oil ministers of UAE, Kuwait and Saudi Arabia that is happening during the weekend, while this report is produced. Remember that OPEC’s Vienna meeting is scheduled for the 22^nd of June.

• US Commerce Secretary Wilbur Ross arrival in Beijing to talk trade (farm and energy commodities)

• Tuesday’s Monetary meeting of Bank of Australia (RBA).

• Poseidonia 2018 fair in Athens Greece, the most prestigious expo of maritime industry as trade in no longer growing double as much as Worlds GDP growth.

• Friday’s and Saturday’s G7 Leaders meeting at Quebec, Canada

JPY

JPY strengthened across the board, braking easily all significant technical levels, but is now back at the levels it has been a week ago.

I could easily short EURJPY in case 129.18 ~129.39 levels are triggered.

Snapshot unchanged:

• Inflation (excluding food-National core CPI) at 0.7% (vs 2.0% target and BOJ’s members expectation of 1.2~1.3% within 2018), BOJ rate at -0.1%

• GDP at 0.90% annual, -0.2% q/q, 10Y Government bonds yield at 0.05% (+1bps w/w) vs BOJ’s target of 0.00% level

• Unemployment at 2.5% (lowest levels since 1993)

Strengths of JPY:

• QQE set to stay in place up until 2020 or beyond.

• Significantly high trade balance at 0.55T JPY

• Increased PMI manufacturing and housing starts reading

Weaknesses of JPY:

• major political uncertainties across the board, seem to be settling down

• latest negative GDP reading

Watch:

• Monday’s 0.50GMT Monetary Base growth. Any number above 7.5% favors JPY.

• Friday’s 0.50GMT Bank Lending and Current Account. Increased numbers favor JPY.

• Friday’s 6.00GMT Economic Watchers Sentiment.

• Next Monetary Meeting on 15^th of June

EURJPY

CAD

Bank of Canada did not surprised markets, but I believe that it is set to increase rates in the future as economy is running at full speed. The main concern was not the slightly decreased GDP reading, but rather the uncertainty from trade policies and Canadians reactions to the new mortgage rules. My focus becomes housing market and lending.

I could take short USDCAD positions in case 1.3138 level is triggered.

Deteriorating Snapshot:

• Inflation at 2.2% (vs 1.0%~3.0% target range, expected to increase again in 2018), BOC rate at 1.25% (3 hikes so far). Note BOC’s confidence on neutral rate within 2.5%~3.5% range.

• GDP decreased to 2.3% (vs BOC expectations of 2.0% in 2018 and long term potential of 1.8%), 10Y Government bonds yield at 2.25% (-10bps w/w)

• Unemployment at 5.8% and expected to decrease further.

Strengths of USDCAD, weakness of CAD:

• Terms of trade (latest reading -4.1B CAD) favors USD

• Uncertainty on trade policies

Weaknesses of USDCAD, strengths of CAD:

• oil moving higher. Remember that the correlation between CAD and oil used to be higher in the past. Last weed was -0.35, now stands at -0.51

• confident communication from Bank of Canada

Watch:

• Wednesday’s 13:30GMT Trade Balance

• Wednesday’s 13.30GMT Building Permits and Friday’s Housing Starts. I want to see increasing numbers that would favor CAD.

• Next Monetary Meeting on 11^th of July.

USDCAD

AUD

I am biased to go long AUDUSD at 0.7517 and 0.7498 levels and long AUDJPY at 0.8150 level, following the upcoming monetary meeting. Before that, I want to see increasing new home sales.

Snapshot unchanged except from decreasing bond yields:

• Inflation at 1.9% (vs 2.0~3.0% target), RBA ‘s rate at 1.50% (no hike so far)

• GDP at 2.4% growth (3.0% could be achieved within 2018 and 2019 according to RBA), 10y Bond yields at 2.70% (-9 bps w/w)

• Unemployment increased slightly to 5.6% but is expected to decline.

Strengths:

• improved trade balance

• improved business confidence and private capital expediture

• China’s good performance

Weaknesses:

• household consumption is a source of uncertainty. Anything that quantifies household consumption (credit growth, wage growth, private capital expenditure) should be noted in the coming months. Latest reading of wages growth and building approvals do not support AUD strengthening

• the 0.7580~0.7600 zone is behaving as a strong resistance.

Watch:

• Tuesday’s new home sales and current account. My long AUD scenario is only supported by growing numbers.

• Tuesday’s 5.30GMT Monetary Meeting

• Thursday’s 2.30GMT Trade Balance. June’s reading has been generally lower than May’s for the last couple of years, so a reading above 1B AUD is within my long AUD scenario.

AUDUSD

USD

The FED meeting in two weeks, could well include the second rate hike for 2018, while at the same time USA is dealing with the consequences of infuriating all of it’s allies. An isolated USA was the theme in latest G7 Finance Ministers and Central Bank Governors Summit.

Snapshot with mixed signals:

• Inflation (Core PCE) at 1.8% (vs 2.0 target and 1.9% FED’s expectations), FED ‘s rate at 1.75%. 6 hikes so far in the business cycle and another 6 hikes expected by the end of 2019, to reach 3.25%. FED’s view of long run rate remains at 2.75%~3.00%

• GDP decreased to 2.8% growth (FED expects 2.7% in 2018), 10y Bond yields at 2.90% (-3 bps w/w)

• Unemployment decreased further to 3.8%

Strengths of USD:

• strong macros (PMI Manufacturing, PMI Services, Durable Goods orders, unemployment)

Weaknesses of USD:

• bond yields are showing that they have found their ceiling

• Tiny decrease of m/m home sales (-3%) and a consumer sentiment that is falling from March’s highs, when Americans were living the positive effects of the new tax law at their pockets. Latest Consumer Confidence bellow 128

• small decrease of GDP q/q to 2.2% from 2.3%

Watch:

• Tuesday’s 15.00GMT Non-Manufacturing PMI.

• Wednesday’s 13.30GMT Trade Balance

• Friday’s 15.00GMT Wholesale inventories as a double check of the point of the business cycle.

• Next Monetary Meeting on 13^th of June.

Source:https://www.treasury.gov US Goverment bonds

EUR

The Italian political situation seems to be contained. Remember what was at stakes at the beginning of 2017, 18 months ago, when EUR/USD was trading at 1.06 and managed to jump above the 200MovingAverage in one weekend, following the first Sunday of France elections. Back then, the possibility of Lepen and Melenchon winning the first round was real. Yet, French elected Macron and Germans at the end approved a new Merkel’s government with the support of SPD. Trying to enforce unrealistic agendas was something that Greeks payed hard. No reason to live one more similar drama.

At current EURUSD levels, and with the different point in business cycle of European and American economy, on the one hand I keep my short EUR/USD bias, but on the other I cannot offer an entry point.

Snapshot improving:

• Annual Core CPI Inflation increased to 1.1% (vs 2.0% target, vs 0.7% previous reading), ECB ‘s rate at 0.00%

• GDP at 2.5% growth (OPEC expects a 2.2% reading), 10y Bond yields of EFSF at -0.36% (+8bps w/w), 10y German Bond yields at 0.39% (-2bps w/w), 10y Italian Bond yield at 2.69% (+24bps w/w, but already back from the 29 June’s 3.10% highs)

• Unemployment at 8.5%

Strengths of EURUSD:

• increased M3 and inflation readings

• sentiment remains high

Weaknesses of EURUSD:

• decreasing PMI Manufacturing and PMI Services readings

• the different point in the cycle between US and EU economy

Watch:

• Monday’s 9.30GMT investor’s confidence reading that is expected to fall

• Tuesday’s 9.30GMT Services PMI reading

• Wednesday’s 09:10GMT Retail PMI reading

• Next Monetary Meeting on 14^th of June

EURUSD

GBP

Snapshot unchanged:

• Inflation at 2.4% (vs 2.0% target), BOE ‘s rate at 0.50% (no hike expected in 2018)

• GDP at 1.2% growth (vs 1.4% previously vs 1.5% OPEC’s estimates), 10y Bond yields at 1.28% (-4bps w/w)

• Record low unemployment at 4.2% (BOE expects to fall further in Q2)

Strengths:

• the bad weather narrative regarding UK’s economy in 1Q18 may prove to be true.

• latest retail sales m/m increase at 1.6% and increased m/m lending to individuals

• unexpectedly higher latest reading of M4(at 0.2%) and Manufacturing PMI (at 54.4)

Weaknesses:

• decreasing inflation readings that postpone rate hikes

• decreasing bond yields

Watch:

• Monday’s 9:30GMT Construction PMI and Tuesday’s 9:30GMT Services PMI. Any number above 52.5 and 52.8 favors my scenario

• Friday’s 9:30GMT Consumer Inflation expectations. I want to see the same 2.9% or higher number.

• Next Monetary Decision on 21 June.

GBPUSD

Disclaimer

Issued by Labis Michalopoulos, CFA

labis@email.com

https://dxml.wordpress.com

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.

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 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.

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