#49_Business as usual, but with fewer cars

US Government Shutdown, Strikes in Europe and India, UK MPs in a dead-end, Trade negotiations

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:

It’s been a poor week for my forecasts. Although I was on the correct side of the trade on 5 out of 5 fronts, no advised entry level has been triggered. The EURJPY uptrend was missed for just 2 pips.

Shorting the USD and Automaker’s Equities around the world (excluding Tesla and VW) are my two themes during 1H2019.

Major events of last week:

  • USA-China: The Vice Minister level meeting, between the two countries, lasted one extra day, with the additional presence of Liu He, head Chinese negotiator. Washington underlines the Chinese promises for additional purchases of US agricultural, oil and LNG products. Beijing appears willing to go the extra mile regarding forced technology transfers and IP protection. The CNY strengthened significantly.

Positioning over a deal finalization within the World Economic Forum (WEF) in Davos, is no longer valid, as Trump will not attend WEF. Lighthizer, Mnuchin and Ross will probably attend WEF.

  • China: The acquisition of MoneyGram (US company) from an Alibaba’s affiliate company was canceled, over fears that US military personnel info could be leaked. Apart from the daughter of Huawei’s founder that was arrested in Canada, another Huawei official was arrested in Poland. The Chinese ambassador in Canada accused Canada for “White egotism and white supremacy”. The founder of Tesla, Elon Musk, has been offered permanent citizenship in China, as Tesla’s manufacturing in China began.

  • USA: The government shutdown continued for a 3rd week. Apart from the Commitment of Traders report that has not been published, an additional list of important economic data are not collected.

  • Turkey-Syria-USA-Russia: John Bolton, the US national security adviser, visited Turkey expecting to meet Erdogan but the meeting never happened. Mike Pompeo stated that the US will make sure that no Iranian influence stays in Syria, downplaying Trump’s latest tweet of leaving Syria.

  • Europe-USA: Trade negotiations, under the threat of 25% tariffs on the EU car industry, that began on July with the Junker visit to the White House, continued with a second meeting of the EU trade commissioner, Cecilia Marlstörm, with Bob Lighthizer, the hawk US trade negotiator, in Washigton. Malstörm denied any possibility of accepting auto quotas in a EU-USA trade deal.

  • Japan-UK: Prime Minister Abe, openly favoring May’s deal, visited the UK, 3 weeks before the beginning of the new EU-Japanese trade deal. The UK is welcome to join the Trans-Pacific Partnership (TPP-11) but it’s natural place is EU.

  • Cryptos: Total market cap decreased to $122bn, -7.50% w/w, -85% from January’s $821bn peak. Ethereum, once again, lost the second place in total market cap.

Major events of next week:

  • Tuesday’s UK Parliament vote on Brexit

  • Thursday’s OPEC monthly report


Long EURJPY at 121.98

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 0.01%(+4bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment at 2.4%

Strengths of JPY:

  • the swap agreement signed with China and the 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: current account (+20%), bank lending, housing starts,capital spending, industries activity, manufacturing PMI

Weaknesses of JPY:

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


  • Monday is a holiday

  • M2, Machinery orders, core national CPI

  • Next Monetary Meeting on 23 January


Long AUDUSD at 0.7080

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 2.30% (-2bps 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 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, retail sales, employment change, household consumption recovered in 3Q18, home loans, wage price index


  • the effects from the flash crash of 3rd January, as well as the possitive effects from trade negotiations between China and USA fade away. This week, there is not enough upside that would justify to take any new position in favor of AUD or CNY at current levels.
  • 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: trade balance, inflation expectations, construction activity, home sales, current account,company operating profits, decreasing capital expenditure, building approvals, private capital expediture, business confidence and consumer’s sentiment


  • Inflation Expectations, new home sales and home loans

  • Next Monetary meeting on February 5


Short USDCAD at 1.3422

Bank of Canada (BOC) has not raised rates during the last week and that was a surprise. Oil prices, the domestic housing market and global trade policies are BOC’s main concerns.

Snapshot improved:

  • Inflation at 1.7% (BOC expects it to hit the 2.0% target by the end of 19 and not within 1Q19 as it was previously expecting), BOC rate at 1.75% (4 hikes in the cycle, neutral rate according to BOC within 2.5%~3.5% range).
  • GDP increased at 2.1% (BOC decreased it’s expectations to 1.7% growth for 2019. Long term potential growth unchanged at 1.8%), GDP m/m at 0.5%, 10Y Government bonds yield at 1.96% (+3bps w/w).
  • Unemployment at 5.6%

Strengths of CAD:

  • federal cabinet shuffle on Monday.

  • OPEC+ recent decision to cut production combined with the decreasing US crude inventories for six weeks in a row, are sending oil higher
  • improving macro readings: GDP, 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:

  • On the one hand it is true that since the announcement of Canadian production cuts, Canadian oil is trading higher. Yet, for the permanent narrowing of the Canadian-WTI spread, all three new pipelines need to be constructed. Keystone XL and Trans Mountain are stalled. Enbridge Line 3 is expected to be delivered by the end of 2019
  • oil demand shock driven by maritime industry may happen on 2020 or even later.
  • deteriorating macro readings: trade balance, Manufacturing PMI


  • Thursday’s OPEC monthly report and particularly the global demand growth number.

  • Friday’s inflation readings

  • Next Monetary meeting on March 4


Shorting USD is my theme for 1Q2019, but I would avoid taking any new position this week.

Snapshot unchanged:

  • Core PCE (=FED’s inflation target) at 1.9%, CPI decreased to 1.9%, FED ‘s rate at 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 2.70%(+3bps w/w)
  • Unemployment at 3.9%

Strengths of USD – Risk off points:

  • FED describes the government’s 3 weeks shutdown immediate effect, as negligible. The effect is currently subtracting -0.12% of GDP growth in 4Q18, -0.06% in 1Q19, adding +0.18% in 2Q19 and distorts both Government spending and Unemployment figures. I cannot imagine a shutdown continuing beyond January 19.
  • The week includes the earning of Citigroup, JP Morgan, Bank of America, Goldman Sachs, Morgan Stanley. I am expecting disappointing numbers.

  • deteriorating macro readings: GDP, inflation, current account, retail sales coupled with increasing business inventory, Non-manufacturing PMI, Manufacturing PMI, home sales, consumer credit, optimism

Weaknesses of USD -Risk on points

  • Trade tensions are on track to be resolved.

  • FED communicated 2 rate hikes during 2019 but markets are currently pricing no rate hike. On December’s meeting there is a 12.5% (from 22.7% the previous week) probability of a rate cut and a 14.5% (from 5.0% the previous week) probability of a rate hike.
  • 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. The last two CPI readings and latest PCE and unit labor cost readings fell.
  • Improving macro readings :durable goods orders, industrial production, consumer sentiment, average earnings, Vehicles sales


  • Bank’s earnings, Capacity utilization rate, Government shutdown drama

  • Next Monetary Meeting on 30 January.


Short EURUSD at 1.1630 in the unlikely event that the level is triggered.

Snapshot improved:

  • Annual CPI at 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 -0.52%(-14bps w/w), 10y German Bond yields at 0.18% (-3bps w/w), 10y Italian Bond yield at 2.91% (-2bps w/w) 10y Greek Bonds yields at 4.30% (-10bps w/w)
  • Unemployment decreased to 7.9%

Strengths of EURUSD:

  • 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: unemployment, current account, retail sales, German Trade balance, wage growth, industrial production, economic sentiment, private loans

Weaknesses of EURUSD:

  • Despite Macron’s promises (i.e. cancellation of tax increases, 100€/month salary increases starting in 2019), towards the“Gillets Jaunes”, that would increase France’s deficit above 3%, riots reached new levels of violence. 12~13 January, is the 9th week of protests, with 300K protesters in Mid-December and 50K protesters the last weekend.
  • 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. Strikes at 3 German Airports
  • deteriorating macro readings: GDP, inflation, Services PMI, investor confidence,consumer confidence, German factory orders, European trade balance, German industrial production, M3


  • Trade Balance, Inflation readings and Current Account

  • Next Monetary Meeting on 24 January


I am keeping my stop limit order to buy GBPUSD at 1.3023. It is a position that would get triggered at the low probability event that UK parliament supports Prime Minister May’s deal on Tuesday.

Snapshot improved:

  • 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 1.29% (+2bps w/w)
  • Unemployment at 4.1%


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

  • improving macro releases: GDP m/m, Manufacturing PMI, Manufacturing production, average earnings, decreased actual inflation, lending to individuals, trade balance, construction output


  • 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.
  • deteriorating macro releases: unemployment, Service PMI, consumer’s confidence, retail sales, current account, industrial order expectations, home prices, Construction PMI, M4


  • Tuesday’s Vote on Parliament.

  • 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.

The snapshot section of each page, contains the latest published figure of major macro releases. It is not a result of now-casting models that would potentially have revealed the effects of current US government shutdown. The coloring of bond yields depends on more than one equation/rule.

My net returns are published in real time at www.forexfactory.com/dxmix I was experiencing an Annual Sharpe Ratio of 1.73 for over 45 months (montly Sharpe ratio above 0.5) . On 24 August, I mistakenly ordered to open a position 10 times bigger that I am used to. My equity level is currently back on track, but my statistics are no longer impressive. My 48 months monthly Sharpe Ratio, that includes the leveraged AUDUSD trade, now stands at 0.30, equal to 1.03 Annual Sharpe Ratio.

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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