10 December-Issue 44

Dancing a 90 day’s Tango, listening the sound of drums

3.5min + 8.5 min = 12 minutes read

Being right for the wrong reasons is a place where no-one wants to admit he is in. Risk-on mode following the Trump-Xi dinner, USDCAD falling after the decisions of the OPEC+ meeting in Vienna, AUDUSD jumping-almost reaching my exit targets and falling on the its Wednesday’s GDP release, USD falling. All of the above happened, all were explicitly called in advance.

I could claim that I was right (5/5 forecasts), but it was for the wrong reasons. My argumentation never included the yields of l0Y and 30Y US government bonds falling that much, gold increasing during the risk-on mode on Monday, USDTRY and USDMXN (risk-on currencies) doing the same, risk-on mode ending so early on.

Other than that I had offered no call for JPY and GBP, and offered one entry level (shorting EURUSD at 1.1470) that was not triggered.

Major events of the last wild week:

  • G-20: The concrete outcome of the Trump-Xi dinner in Argentina, is that tariffs will not be increased up until the 1st of March.

  • USA-China: Huawei’s CFO and the daughter of the founder was arrested in Canada and faces extradition to USA. China’s embassy demanded her release. Huawei has currently the most advanced available 5G solution for mobile providers. Yet, New Zealand and Australia have already rejected it and British Telecom is in the process of removing all of Huawei’s equipment used in it’s network.

  • UN: The Resolution against Hamas did not pass as China,Russia, Turkey, South Africa and all Arabic Nations (Saudis, Qatar, UAE and Iran) voted against it. India conveniently passed. Archiving this vote is either spooky (…) or irrelevant (in a binary vote, the multidimensional nature of power is not revealed, and by default you only get to count two sides.)

  • Reagan-Gorbachev 1987 Nurclear treaty: Mike Pompeo announced that USA would withdraw from the Intermediate-Range Nuclear Forces Treaty within 60 days, blaming Russia for not complying. Remember that China, India, Pakistan and Iran are not limited by this treaty.

  • Ukraine-Russia: The bright side is that there were no new breaking headlines. Yet, the situation is still unsettled. Nancy Youssef, journalist covering Pentagon, reported on the WSJ that a US military plane flew over Ukraine on Thursday, with U.S., Canadian, German, French, UK, Romanian and Ukrainian observers aboard.

  • Yemen: Peace negotiations are happening in Sweden.

  • OPEC+ meeting in Vienna: The gathering had a weird start, with Qatar announcing that they are leaving the organization and Brian Hook (Washington’s special representative for Iran) meeting the Saudis. No announcement was made at the expected press conference on Thursday but at the end, following the Saudis-Russian meeting OPEC+ agreed to cut production by 1.2MBpday. Earlier Canada announced that they will cut production of 0.3MBpday following January 1st, to deal with low prices.

  • EU-UK, EU-Switzerland: The UK drama is covered at the GBP page. Switzerland is also facing a deadline by the end of the year, to either accept EU rules on migration, social security, contribution to the EU’s budget, the European Court of Justice as the accepted body for EU-Switzerland differences, or lose the “equivalence regime status” it’s exchange is enjoying

  • France: President Macron backed out of the fuel tax increases, but the “Gillets Jaunes” riots continue.

  • Cryptos: Total market cap contraction continues to $104bn, -20% w/w, -87% from January’s $821bn peak. With costs of mining not dropping, bitcoin is in a death spiral

Major events of next week:

  • Monday’s meeting of EU foreign ministers. The agenda includes Russian sanctions

  • Tuesday’s vote of UK Parliament on the Brexit deal.

  • Thursday’s monetar

    Original Chart downloaded from howmuch.net

    y meeting of ECB and the Central Bank of Norway


I would go short EURJPY at 128.95

Snapshot and arguments unchanged:

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

  • GDP at 0.30% annual, -0.3% q/q, 10Y Government bonds yield at 0.06%(-3bps 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, monetary base, 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, household spending, manufacturing PMI,Services PMI, M2,trade balance and current account, all industries activity


  • Monday’s GDP. Contrary to Markets expectation of -0.5% q/q, I expect a positive surprise

  • Tuesday’s M2, Wednesday’s Core Machinery Orders, Friday’s Manufacturing PMI

  • Next Monetary Meeting on 20 December


No forecast for AUDUSD

At my last three reports I was noting that AUD is moved by the development of China-USA trade talks and I was favoring long AUDUSD trades. Monday’s gap paid off but the subsequent communications was a reason to exit from this trade.

Snapshot deteriorated:

  • Inflation at 1.9% (expected 2.25% in 2019), RBA ‘s rate at 1.50% (no hike so far)

  • GDP decreased to 2.8% (RBA expects 3.5% in 2018 and 2019), 10y Bond yields at 2.44% (-15bps w/w, +2bps w/w yield spread with the US 10y bonds)

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


  • USDCNY has some more room to run up until the 6.70 level that would help AUDUSD moving higher. Yet we need first to here some good news from the US-China front.

  • RBA expects GDP growth to reach 3.5% within 2018 and 2019 before slowing in 2020. My first reaction is to build long positions on January, but it is premature to argue on that.

  • 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


  • I was expecting a change in the communication of RBA, signaling the first rate hiking in April 2019. Last week’s media release had nothing on that front. 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

  • 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


  • Tuesday’s House Price Index and Business Confidence

  • Wednesday’s Consumer Sentiment. A release below -0.1% provided with USDCNY is stable or heads north, is a good reason to short AUDUSD.

  • Next Monetary meeting on February 5


I would short USDCAD at 1.3380, 1.3400 and 1.3420 targeting 1.3178

Snapshot improved.

  • Inflation at 2.4% (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 0.1%, 10Y Government bonds yield at 2.08% (-19bps w/w).

  • Unemployment decreased to 5.6%

Strengths of CAD:

  • OPEC+ decided on a 1.2MBpd production cut. On top there was the first release since the last 10 weeks in a row that US crude inventory decreased

  • my take from last week’s monetary policy communication, combined with the rising inflation is that Canada will rise rates at the next meeting

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

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

Weakness of CAD:

  • Alberta Premier, Rachel Notley, announced that they will cut oil production by 0.3MBpday to fight the widened discount they are selling. Alberta’s oil is traded at -37$ (-70%) price discount over WTI and they want to narrow it by at least 4$. Investments on oil transportation are expected to have an effect by late 2019

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

  • deteriorating macro readings: GDP, wholesale sales, retail sales, trade balance


  • No market moving news expected this week

  • Next Monetary meeting on January 9.



I keep my ground and favor short USD positions

Bloomberg’s Tuesday headlines were like “The Chronicle of a Yield Inversion Foretold”

It is true that the 2Y-10Y spread is alarmingly close to zero ( just 13bps points), mainly due to the the drop of the 10Y, 20Y and 30Y yields, and it is also true that this spread has been -in the past- a reliable indicator of recessions. Yet, 3Y bonds yielding 2bps more than the 5Y, is more of a supply-demand thing than anything else, and does not deserve a breaking news headline coverage.

Snapshot unchanged:

  • Core PCE (=FED’s inflation compass) at 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 2.86%(-13bps w/w)

  • Unemployment at 3.7%

Strengths of USD – Risk off points:

  • geopolitics. Excluding the Yemen peace negotiations and the OPEC+ meeting, the rest of the last week’s major events section and particularly the vote regarding Hamas, are alarming

  • deteriorating macro readings: home sales, consumer confidence, optimism

Weaknesses of USD -Risk on points:

  • following a fiscal boost, like the one 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.

  • US economy grows with no signs of inflation . Latest core PCE and unit labor cost readings both fell.

  • Improving macro readings : Manufacturing PMI, Non-manufacturing PMI, Services PMI, durable goods orders, retail sales, consumer credit, personal spending and personal income increase


  • Wednesday’s inflation

  • Friday’s Retail sales, Capacity Utilization rate, Manufacturing PMI, Service PMI and Business inventories

  • Next Monetary Meeting on 19 December. The propability of a rate hike is almost certain at 71.5% but decreased from the 82.7% number of last week.



No forecasts for EURUSD

Snapshot deteriorated:

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

  • GDP decreased to 1.6%(OPEC ‘s expectations reduced further to 1.9%), 10y Bond yields of EFSF at -0.31(+6bps w/w), 10y German Bond yields at 0.25% (-6bps w/w), 10y Italian Bond yield at 3.16% (-7bps w/w, +36bps in 11 weeks), 10y Greek Bonds yields at 4.23% (-4bps w/w)

  • Unemployment at 8.1%

Strengths of EUR/USD:

  • Di Maio has been reported by “Il Messaggero” that he would negotiate a 1.9%-2.0% deficit vs the initial 2.4% deficit he was proposing with Salvini, a budget that has already been approved by the Lower House.

  • fiscal policies will not be as neutral as previously expected.

  • improving macro readings: Manufacturing PMI, Services PMI, retail sales, M3, wage growth, German factory orders, industrial production

Weaknesses of EURUSD:

  • Political unrest in France, Merkel stepping down from the leadership of her party

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

  • The German Economy reported negative GDP q/q growth

  • deteriorating macro readings: GDP, inflation, investor confidence and economic sentiment, German Trade balance, European trade balance, current account, German industrial production


  • Tuesday’s Economic sentiment, Wednesday’s industrial production

  • Thursday’s Monetary Meeting of ECB

  • Friday’s Manufacturing and Services PMI


I put a stop limit buy order on GBPUSD at 1.3030

Given the Tuesday’s vote in the UK parliament, when Prime Minister May lost the vote and was forced to publish the attorney’s general legal advise on Brexit, which she was presenting as confidential, the stalemate is getting closer. Watching the bellow 3minutes video is still relevant. https://www.youtube.com/watch?v=FOyX5FGT8zc

My call is counter-intuitive. It would either never get triggered, as the expected disorder Brexit becomes a reality, or it will get triggered and get paid at the unlikely event of the deal being approved from parliament.

Snapshot and arguments 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% OPEC’s expectations), 10y Bond yields at 1.27% (-9bps w/w)

  • Unemployment at 4.1%


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

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


  • 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, construction output, consumer’s confidence, current account, industrial order expectations, home prices, retail sales and retail sales monitor


  • Monday’s GDP

  • Tuesday’s Parliament Brexit Vote

  • 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. 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 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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