#48_The year of the short squeeze(?)

12 minutes read report, 9 pages

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.

How the forecasts did:

The reason that ‘guru’ is such a popular word is because ‘charlatan’ is so hard to spell. In the last 48 issues, I hope this report proved valuable to your weekly trading. Out of 170 forecasts, 48.24% paid off, 18.82% resulted in drawdowns and 32.94% were never triggered.

It is worth noting: (a) 13 out of 170 forecasts (7.65%) hit bull’s eye (a call of week’s peak or week’s trough with an accuracy of maximum 3 times the spread), (b) my remarks on issue 25 (28 July) , when I was calling to go long Equities until the end of September, but also (c) my remarks on issue 36 (13 October) when I was calling that Equities were having a February like drop.

Over the last two weeks, no forecasts have been made, as liquidity was thin during the Christmas holidays.

Major events of the last week:

  • China’s space probe successfully landed on the other side of the moon.

  • USA-China: President Xi favored cooperation with the USA and reunification with Taiwan. Note that only 16% of Taiwanese support reunification with China. Vice Minister level trade talks between the USA and China are scheduled on Monday. Additionally there could be a meetings between Lighthizer and Liu He. Meanwhile the USA issued a travel advisory against China.

  • China: The Bank reserve ratio will be cut by 100bps (50bps starting from 15 January and another 50bps starting from 25 January) adding liquidity to the Chinese economy.

  • USA: The government shutdown continues. Apart from museums and zoos not working, the Commitment of Traders report was not published due to the shutdown.

  • USA-North Korea: Addressing his nation on TV, President Kim said that “demilitarization is his firm will”. Trump responded with a tweet that “He looks forward meeting him”

  • Flash-crash: On Wednesday at 22.00 GMT, while fx markets were thin there was a 3 minute crash in the fx market affecting JPY and AUD pairs. The move has been reversed.

  • Cryptos: Total market cap at $132bn, +0% w/w, -84% from January’s $821bn peak. Ethereum surpassed Ripple to become once again the second cryptocurrency in total market cap.

Major events of next week:

  • Wednesday’s Monetary Meeting of Bank of Canada. A rate hike is expected


Long EURJPY at 123.37 and 121.24

Snapshot unchanged:

  • Core CPI (=BOJ’s compass) decreased to 0.9% (2.0% target), CPI decreased to 0.8%, BOJ rate at -0.1%
  • GDP at 0.00% annual, -0.6% q/q, 10Y Government bonds yield at -0.03%(-3bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment at 2.4%

Strengths of JPY:

  • Agreement signed with China and trade agreement with EU to come into force within 1st February
  • 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: monetary base, housing starts,capital spending, industries activity, manufacturing PMI and sentiment readings

Weaknesses of JPY:

  • Following Wednesday’s flash-crash when JPY strengthened by more than 4% against EUR and USD in a couple of minutes, and the subsequent reversion of the move, it seems that current levels are an opportunity to go long

  • deteriorating macro readings: GDP reading (expected to decrease in 2019), inflation, retail sales, unemployment, bank lending, household spending,Services PMI, M2, trade balance and current account, industrial production


  • Monetary base, Consumer Confidence, average cash earnings that are expected lower

  • Household spending and bank lending that are expected to improve

  • Next Monetary Meeting on 23 January


Long AUDUSD at 0.7060 and 0.7023

Snapshot unchanged:

  • Inflation at 1.9% (expected 2.25% in 2019), RBA ‘s rate at 1.50% (no hike so far)
  • GDP at 2.8% (RBA expects 3.5% in 2018 and 2019), 10y Bond yields at 2.32% (-4bps w/w, +5bps w/w yield spread with the US 10y bonds)
  • Unemployment at 5.1% (expected to reach 4.75% by the end of 2020)


  • The week includes trade talks between China and the USA that would have a positive impact on AUD.

  • The subsequent move of the pair following Wednesday’s flash-crash.

  • The move of China’s Central Bank to release $116bn extra liquidity by decreasing the bank’s required reserve ratio.

  • RBA expects GDP growth to reach 3.5% within 2018 and 2019 before slowing in 2020.

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


  • 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.
  • Australia is having a minority government and RBA signals no rate hike
  • deteriorating macro readings: inflation expectations,, construction activity, home sales, current account,company operating profits, decreasing capital expenditure, building approvals, retail sales, private capital expediture, business confidence and consumer’s sentiment


  • Trade balance, building approvals, retail sales. The later two are expected to help long AUDUSD positions

  • Next Monetary meeting on February 5


Short USDCAD at 1.3463 and 1.3554

Snapshot unchanged:

  • Inflation at 1.9% (vs 2.0% 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 0.5%, 10Y Government bonds yield at 1.93% (-4bps w/w).
  • Unemployment at 5.6%

Strengths of CAD:

  • since the announcement that Canada will cut production starting from January 1st, Canadian oil is already trading higher.
  • OPEC+ recent decision to cut production combined with the decreasing US crude inventories since December 6, are sending oil higher
  • Markets are expecting a rate hike in this week’s monetary meeting
  • investment indicator rebounded to a high level, following the recent USMCA deal
  • improving macro readings: current account,unemployment, building permits, Ivey PMI (index constructed from survey of purchase managers), manufacturing sales, wholesale sales, retail sales, foreign securities purchases, corporate profits

Weakness of CAD:

  • oil demand shock driven by maritime industry may happen on 2020 or even later.
  • deteriorating macro readings: GDP, trade balance, Manufacturing PMI


  • Housing starts and Building permits

  • Wednesday’s Monetary meeting. A rate hike is expected


Shorting USD will be my theme for 2019.

US economy is growing with robust numbers with no sign of inflationary pressures. The statistics from the last 6 US recessions, as presented by John Konstantinidis reveal that from the time the yield curve inverts (as it happened during December 2018), we need 9.7months (on average) for the markets to peak (i.e.September 2019) and another 5months for the start of a recession.

Snapshot deteriorated:

  • Core PCE (=FED’s inflation target) increased to 1.9%, CPI at 2.2%, FED ‘s rate increased to 2.50% and expected to reach 3.0% within the cycle. FED’s view of long run rate at 2.9%
  • GDP at 3.0%y/y (expected to fall to 2.3% within 2019), 3.4% q/q, 10y Bond yields at 2.67%(-9bps w/w)
  • Unemployment increased to 3.9%

Strengths of USD – Risk off points:

  • the 3rd government shutdown that started 2 weeks ago (22 December) may continue
  • deteriorating macro readings: GDP, current account, retail sales coupled with increasing business inventory, Manufacturing PMI, home sales, consumer confidence, optimism

Weaknesses of USD -Risk on points

  • FED is communicating 2 rate hikes in 2019. Markets are currently pricing no rate hike during 2019 and there is a 22.7% probability of a rate cut vs a 5.0% probability of a rate hike on December’s meeting.

  • following a fiscal boost, like the one the USA experienced due to the 2017 tax reform, economy accelerates and then falls back to sustainable levels. Forecasting lower GDP growth for USA in 2019, is nothing more than that, and should not scare us.
  • The US economy grows with no signs of inflation as capacity utilization is getting higher. Latest CPI, core PCE and unit labor cost readings both fell.
  • Improving macro readings : Non-manufacturing PMI, durable goods orders, industrial production, consumer credit, consumer sentiment, average earnings, Vehicles sales


  • Trade balance, Consumer credit, inflation readings

  • Next Monetary Meeting on 30 January.


No forecast

Snapshot deteriorated:

  • Annual CPI decreased to 1.6%, core CPI (=ECB’s compass) at 1.0%, ECB ‘s rate at 0.00%
  • GDP at 1.6%, 10y Bond yields of EFSF at -0.38%(-5bps w/w), 10y German Bond yields at 0.21% (-3bps w/w), 10y Italian Bond yield at 2.93% (+18bps w/w) 10y Greek Bonds yields at 4.40% (+3bps w/w)
  • Unemployment at 8.1%

Strengths of EURUSD:

  • Italy reached a budget deal with the EU.
  • The EU-Japan trade deal, set to start on February 1st, could provide a much needed boost to EU’s GDP growth.
  • improving macro readings: current account, retail sales, wage growth, German factory orders, industrial production, economic sentiment, private loans

Weaknesses of EURUSD:

  • Macron’s promises (i.e. cancellation of tax increases, 100€/month salary increases starting in 2019), addressing the“Gillets Jaunes” riots, would increase France’s deficit above 3%.
  • when Draghi is arguing that by the time QE started, there was no other driver of European growth (no fiscal stimulus, no demand for EU’s exports), I am getting worried as I am questioning how far such drivers are now present

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

  • The German Economy reported negative GDP q/q growth
  • deteriorating macro readings: GDP, inflation, Services PMI, investor confidence,consumer confidence, German Trade balance, European trade balance, German industrial production, M3


  • German factory orders and retail sales, investor confidence, retail sales, unemployment

  • Next Monetary Meeting on 24 January


I would keep my stop limit order to buy GBPUSD at 1.2940, recognizing that it is unlikely to be triggered) as we are heading to uncharted territory.

We are only 2 weeks away from the date the Parliament will most probably reject May’s deal with the EU.

Snapshot unchanged:

  • Inflation at 2.3% (vs 2.0% target), BOE ‘s rate at 0.75%
  • GDP at 1.5% (vs 1.75% BOE’s expectations and 1.3% OPEC’s expectations), 10y Bond yields at 1.27% (+0bps w/w)
  • Unemployment at 4.1%


  • without Brexit uncertainty, BOE would have think more of rising rates

  • positive macro releases: GDP m/m, Manufacturing PMI, , average earnings, decreased actual inflation, lending to individuals, trade balance, retail sales


  • the ongoing uncertainty is already evident at macro readings

  • 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.
  • Even if UK parliament approves the draft deal, a discount for uncertainty remains as future trade relations will be defined later.
  • Negative macro releases: unemployment, Service PMI, Manufacturing production, consumer’s confidence, current account, industrial order expectations, home prices, Construction PMI, M4


  • Politics

  • Retail sales monitor, GDP, manufacturing production, construction output. I am expecting a lower reading than the consensus for 0.1% m/m GDP growth.

  • Next Monetary Meeting on 7 February


Issued by Labis Michalopoulos, CFA




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

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. My equity level is currently back on track, but my statistics are no longer impressive.

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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