13 August_Issue 27

Holiday season peak

Noting that the week that have passed is traditionally full of geopolitical events was totally correct. Nevertheless, Friday has been disastrous for my last week’s forecasts as TRY plummeted, strengthening safe havens (JPY ,USD) beyond expectations. EUR/JPY did not consolidated within 128.30~131.88 range, AUD/USD did not bounce at 0.7365, EUR/USD did not bounce at 1.1510 and GBP/USD found no support. No view has been offered for USD/CAD.

Major last week’s events (a week that traditionally included geopolitical, market moving events):

  • Tariffs front: 25% tariffs decided to be imposed as of 23 of August on 16B$ worth of Chinese products. China would retaliate reciprocally.
  • NAFTA: No news under my radar

  • Turkey: No actions has been taken by Turkish Central Bank, the announcements made on Friday by Turkish government were not persuasive and USD/TRY reached 6.7480
  • Iran,Syria, North Korea: Rouhani (Iranian PM) is said to be willing to negotiate with US in a week that marked the first 90 day period for companies to follow US directions and wind down their projects and trading in Iran.
  • US Transformation: No news.

  • Cryptos: Total market cap collapsed to 207$, -22% w/w, as expectations for an ETF on Bitcoin are fading away

Major next week events:

  • Monday’s OPEC monthly report. Note that on latest July’s report a concurrent decline of global demand and increase of global supply has been recorded.


Snapshot mixed:

  • Core CPI (=BOJ’s compass) at 0.8% (vs 2.0% target and BOJ’s members expectation of 1.2~1.3% within 2018), BOJ rate at -0.1%
  • GDP at 1.00% annual, 0.5% q/q, 10Y Government bonds yield at 0.10% (-1bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment at 2.4%

Strengths of JPY:

  • QQE will stay, up until core CPI reads 2.0% in a stable manner. The scheduled VAT hike on Oct19, rules out any possible monetary policy change, earlier than 2020.

  • increasing inflation, retail sales, improved GDP reading, trade balance, increased Manufacturing PMI

  • continued devaluation of CNY

  • TRY plummeting

Weaknesses of JPY:

  • equities bear scenario is fading away as earnings are impressive and the negative effects of tariffs on global GDP is priced in without exaggerations

  • decreased readings of Services PMI, monetary base, household spending, bank lending, machine orders


  • No market moving announcement is expected

  • Next Monetary Meeting on 19 September


I could short USD/CAD at 1.3150 and 1.3240 given that OPEC’s monthly report favors oil picking up.

Snapshot mixed:

  • Inflation at 2.5% (on target), BOC rate at 1.50% (4 hikes so far, neutral rate according to BOC within 2.5%~3.5% range).

  • GDP at 2.3% (vs BOC expectations of 2.0% in 2018 and long term potential of 1.8%), 10Y Government bonds yield at 2.30% (-5bps w/w)

  • Unemployment decreased to 5.8%

Strengths of USD/CAD, weakness of CAD:

  • last week’s south move was huge, given that oil did not appreciate, so a bounce back up until 1.3120 level, is possible
  • latest disappointing housing market readings

  • oil strengthening as a result of sanctions on Iran being implemented, has not yet materialized

Weaknesses of USD/CAD, strengths of CAD:

  • strong GDP, trade balance, retail sales and unemployment readings

  • Nafta negotiations are proceeding


  • Monday’s OPEC monthly report on oil market

  • Friday’s inflation readings.

  • Next Monetary Meeting on 5th of September.


I could add to my long AUD/USD trade at 0.7284.

Snapshot unchanged:

  • Inflation at 2.1% (vs 2.0~3.0% target, and expected to decline during 3Q18), RBA ‘s rate at 1.50% (no hike so far)

  • GDP at 3.1% (RBA expects more than 3.0% within 2018 and 2019), 10y Bond yields at 2.59% (-14 bps w/w)

  • Unemployment at 5.4% (expected to reach 5.0% by 2020)


  • significant increase of GDP

  • improved business confidence & profits, private capital expenditure, building approvals, new home sales and latest impressive increase of consumer sentiment


  • Market participants expect the rates to remain unchanged for a considerable period of time

  • Political landscape in Australia is changing following elections in Tasmania and Queensland

  • inflation expected to fall and increased trade balanced is not expected in the near future


  • Wednesday’s wage price index, Thursday’s inflation expectations and unemployment readings. All releases could show increased numbers and favor the long AUD/USD trade.

  • Next Monetary Meeting on 4th of September


Last week I was expecting that USD would eventually weaken. Nevertheless, I have warned my readers to watch for the 10y Bond Auction and the m/m change of Wholesale inventories because an increasing number would contradict the short USD scenario.

I hope the Thursday’s 15.00GMT release of wholesale inventories -before the USD’s north move above 95.23- saved my readers from commiting to a short USD trades.

I keep being biased to short USD.

Snapshot unchanged:

  • Core PCE (=FED’s inflation compass) at 1.90%, FED ‘s rate at 1.95% (IOER) and expected to reach 3.1% within the cycle. FED’s view of long run rate at 2.9%

  • GDP at 4.1%, 10y Bond yields at 2.87% (-8 bps w/w)

  • Unemployment at 3.9% (vs natural rate of unemployment of 4.5%), FED expects 3.6% unemployment in 4Q18 and 3.5% for 2019 and 2020.

Strengths of USD:

  • strong macros: GDP reading, Factory orders increasing, Manufacturing and services PMI continue to be above 55 for an extended period of time

  • the increasing wholesale inventories, coupled with decreasing consumer credit are alarming signals that do not help equities and push USD higher as it enjoys a safe haven status.

  • TRY plummeting

Weaknesses of USD:

  • S&P500 continues to be above the technically significant level of 2822.

  • 10y Government Bond yields refusing to cross 3.0% yield

  • I assume Erdogan (Turkish PM) will eventually let his central bank defend TRY and current overpriced fear will fade away. Turkey is not Venezuela.


  • Wednesday’s Unit Labor cost q/q change. A small number is expected, but in case the reading is above 1.0% it may push USD higher.

  • Next Monetary Meeting on 26 September, when a new hike is expected.



I keep my long EUR/USD position, opened at 1.1510, and expect a bounce as the pair approaches the 200Day Moving Average.

Snapshot unchanged:

  • Annual CPI at 2.1%, core CPI (=ECB’s compass)at 1.1%, ECB ‘s rate at 0.00%

  • GDP at 2.1% growth (OPEC expects a 2.2% reading), 10y Bond yields of EFSF at -0.35% (-3bps w/w), 10y German Bond yields at 0.32% (-9bps w/w), 10y Italian Bond yield at 2.99% (+6bps w/w)
  • Unemployment at 8.3%

Strengths of EUR/USD:

  • M3 growth, service and manufacturing PMI levels

  • increasing inflation and decreasing unemployment

Weaknesses of EUR/USD:

  • the devaluation of CNY argument is pointing more to EUR/USD weakening than strengthening.

  • any possible equity sell off

  • latest decreased GDP reading, business climate and confidence readings refusing to increase

  • divergence of monetary policy between EU and US, that can only be simulated with two expected down facing waves on September and December


  • Tuesday’s ZEW Economic Sentiment that is expected to increase

  • Wednesday is a Bank Holiday

  • Thursday’s Trade Balance, Friday’s Current Account and Friday’s inflation readings that I want them to confirm expectations for my long EUR/USD scenario to stay valid. Trade Balance bellow 16.5B€, Current Account bellow 23.2B€ and core CPI bellow 1.1% may send EUR lower.
  • Next Monetary Meeting of ECB on 13th of September.


Week began with Liam Fox (UK’s trade secretary) arguing for the likelihood of a no deal scenario, adding to Mark Carney’s (Governor of BOE) last weeks reply during the monetary press conference, that the range of Brexit outcomes is wide.

I stand my ground that UK will find a productive way to finalize it’s relations with EU and that current GBP levels will prove low.

I am re-entering long GBP/USD at 1.2550 level, targeting 1.3800

Snapshot improved:

  • Inflation at 2.4% (vs 2.0% target), BOE ‘s rate at 0.75%

  • GDP increased to 1.3% growth (1.4% OPEC’s estimates vs 1.75% BOE’s expectations), 10y Bond yields at 1.24% (-9bps w/w)

  • Unemployment at 4.2% (BOE expects to fall further in Q2)


  • the bad weather narrative for Q1 still makes sense.

  • despite last week’s indications that favor the hard Brexit scenario, I keep my view that markets are overpricing the probability of a hard Brexit.

  • Macro picture is improving (GDP, construction activity and housing market)


  • latest M4, retail sales and average earnings

  • latest Manufacturing and Services PMI that were decreasing


  • Wednesday’s inflation readings. An incereased 2.5% reading could well be a reason to send GBP higher

  • Next Monetary Meeting on 13th of September



Issued by Labis Michalopoulos, CFA




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.

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

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