05 November-Issue 39

Will the CNY raly continue?


No forecast. The latest monetary meeting offered no news.

Snapshot was mixed :

  • Core CPI (=BOJ’s compass) at 1.0% (2.0% target,expects 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%(+1bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment decreased to 2.3%

Strengths of JPY:

  • 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: GDP reading, inflation, unemployment, bank lending, housing spending, capital spending, sentiment readings and all industries activity

Weaknesses of JPY:

  • real GDP readings are expected to decrease within 2019

  • deteriorating macro readings: retail sales, manufacturing PMI, housing starts,Services PMI, M2, industrial production,trade balance and current account


  • Wednesday’s Average Cash Earnings, Thursday’s bank lending, current account and Friday’s M2. All readings are expected to be deteriorating sending JPY lower

  • Next Monetary Meeting on 20 December


No forecast

Snapshot was mixed.

  • Inflation at 2.2% (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 2.52% (+13bps w/w).
  • Unemployment decreased to 5.8%

Strengths of CAD:

  • the volatile inflation readings were explained by the volatile airfare prices so the recent drop has not postponed BOC’s rate hike. The 1.75% rate is still characterized as stimulative
  • investment indicator rebounded to a high level, following the recent USMCA deal
  • oil prices are heading south as demand growth is slowing and inventory levels are rising. I am expecting a new rally from current 72.54$ levels.
  • US approved waivers to 8 countries so that they continue buying oil from Iran (Japan, India, China, South Korea, Turkey, UAE, Singapore, Syria). Older waivers, during Obama era, were issued to 20 countries, and asked for 20% decrease of purchases every 6 months so that the waivers were renewed. Remember that the goal of the sanctions on Iranian oil, shipping, ship building and banking sectors, is to decrease state’s revenues. USA uses the 72~80$ per barrel Brend price range as a benchmark and already estimates a -1MBpd reduction of Iranian oil supply since May.

  • improving macro readings: unemployment, trade balance

Weakness of CAD:

  • oil demand shock driven by marine-time industry may happen on 2020 or even later.
  • deteriorating macro readings: GDP, Manufacturing PMI, housing market, wholesale sales, foreign securities purchases and retail sales


  • Tuesday’s building permits and Wednesday’s Ivey PMI

  • Next Monetary Meeting on 5 December


No forecast. AUD is currently moved by the will of Chinese interventions and the development of China-USA trade talks. Any news in the direction of a trade deal to be signed at the next G20 meeting on 30th of November, favors AUDUSD. The absence of such news pushes AUDUSD lower.

Snapshot deteriorated:

  • Inflation decreased to 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 expects more than 3.0% within 2018 and 2019), 10y Bond yields at 2.70%(+11bps w/w)
  • Unemployment at 5.0% (was expected to reach that level by 2020)


  • AUD is demonstrated a persuasive behavior during all latest equity sell offs.
  • I expect Australian Household consumption to increase

  • improving macro readings: GDP, employment change, household consumption recovered in 3Q18, trade balance, consumer sentiment, home sales


  • Australia is having a minority government
  • RBA’s rate expected to remain unchanged
  • deteriorating macro readings: current account,company operating profits, decreasing capital expenditure, building approvals, home loans, business confidence, retail sales


  • Tuesday’s Monetary Policy meeting. My focus is on any remarks on household consumption and Chinese currency.

  • Wednesday’s Construction Index and Friday’s home loans



I continue favoring short USD positions.

Snapshot improved:

  • Core PCE (=FED’s inflation compass) at 2.0%, CPI at 2.3%, 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, 3.5% q/q, 10y Bond yields at 3.20%(+12 bps w/w)
  • Unemployment at 3.7%

Strengths of USD – Risk off points:

  • The combination of increasing wholesale and business inventories and decreasing retail sales is alarming
  • Equities rebounded from -10% level but failed to cross the 200Day Moving average
  • Government bond yields are rising again

Weaknesses of USD -Risk on points:

  • Stronger USD does not help neither equities nor US economy

  • inflation is not worrying. Latest releases showed decreasing numbers, labor cost data decreased & Trump canceled a 2.1% wage raise for federal employees.
  • GDP, Manufacturing PMI, Non-manufacturing PMI, Services PMI, durable goods orders and housing market are all recording big and increasing numbers.

  • risk-on news like a EU-UK negotiations concluding, consensus with China, may simultaneously hit the headlines sending USD lower. I believe that the worse outcome of both topics is already priced and new data with an optimistic flare, even when it is only a tweet, are having huge effects. The bellow tweet was published on 1st November on 14.00GMT


  • Monday’s Final Services PMI and Non-Manufacturing PMI

  • Tuesday’s Midterm Elections and the Wednesday’s European Opening

  • Thursday’s Monetary Meeting. No news are expected.

  • Friday’s Wholesale Inventories. The risk-on scenario is helped with 0.3% or lower reading



No forecasts

Snapshot was mixed:

  • Annual CPI increased to 2.2%, core CPI (=ECB’s compass) increased to 1.1%, ECB ‘s rate at 0.00%
  • GDP decreased to 1.7%(OPEC reduced expectations to 2.0%), 10y Bond yields of EFSF at -0.32(-5bps w/w), 10y German Bond yields at 0.43% (+6bps w/w), 10y Italian Bond yield at 3.33% (-14bps w/w, +49bps in 6 weeks), 10y Greek Bonds yields at 4.30% (-0bps w/w)
  • Unemployment at 8.1%

Strengths of EUR/USD:

  • Italian debt latest downgrade by rating agencies, has been downplayed by markets. For the last 2 weeks, yields of European periphery bonds are decreasing
  • inflation is peaking up

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

  • improving macro readings: M3, wage growth, German factory orders, industrial production, current account and trade balance

Weaknesses of EURUSD:

  • Italian budget drama may be prolonged until the end of 2018

  • 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, Manufacturing and Services PMI, retail sales, investor confidence and economic sentiment


  • Monday’s Investor confidence, Tuesday’s Services PMI and German Factory Orders. The readings are not expected to favor long EURUSD positions

  • Wednesday’s Retail Sales and Thursday’s German Trade Balance are expected to favor long EURUSD positions

  • Next Monetary Meeting on 13 December


No forecast for GBP.

An extra EU summit in November has not been scheduled yet, nor a new meeting between Michel Barnier and Dominic Raab, the two head negotiators. The week included headlines revealing that Prime Minister May is likely to have reached a deal on financial services,

Snapshot unchanged:

  • Inflation at 2.4% (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 1.50% (+11bps w/w)
  • Unemployment at 4.0%


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

  • positive macro releases: Services PMI and Construction PMI, average earnings, decreased actual inflation, lending to individuals


  • 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:GDP m/m, M4, Manufacturing production, Manufacturing PMI, construction output, consumer’s confidence, current account, industrial order expectations, retail sales


  • UK politics and negotiation process

  • Monday’s Services PMI

  • Friday’s GDP reading and Trade balance

  • 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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