17 December-Issue 45

Ready for the 2019 downtrend since 2015

15 minutes read report, 9 pages

How the forecasts did:

2 out of 3 correct forecasts is the outcome of the last week’s report. Shorting EURJPY at 128.95 and USDCAD at 1.3380, 1.3400 and 1.3420, played well but shorting USD index is in the red. Other than that, I had offered no call for AUDUSD, EURUSD and GBPUSD.

Major events of the last week:

  • USA-China: China is ready to decrease tariffs on US cars to a 15% rate. The rate was at 25% and then moved to 40% as a retaliation measure against Trump’s tariffs.

On Thursday an initial purchase of $500million worth of US soybeans has been made.

Huawei’s CFO was bailed out, giving her Chinese and Hong Kong passports, agreeing to stay in Vancouver wearing a GPS tracker and depositing $7.5million. Next court appearance is set to February 6. Trump said that he could intervene in the case if it would result in a trade deal with China. Meanwhile, a former Canadian diplomat and another Canadian, named Michael Spavor have been detained in China. The later organized the Kim (North Korea) -Dennis Rodman (Former NBA player and participant in 2 seasons at the Apprentice reality show, hosted by Trump) meeting,

  • Impeachment talking: Following the 3 years sentence of Michael Cohen, longtime lawyer of Trump, and Maria Butina pleading guilty, another one with a role at Trump’s presidential campaign, impeachment talking resumed. There is no cause and effect relation.Nevertheless, impeachment talking and US military action overseas were concurrent themes, in the past.

  • Ukraine-Russia-EU: EU decided to prolong sanctions against Russia for another 6 months.

  • Yemen: A cease fire for humanitarian purposes has been brokered between the Saudi led coalition and Houthi rebels, to be implemented in the next 21 days. Meanwhile the US Senate voted to stop supporting the Saudi led coalition, but it would need Trump’s signature for USA to do so.

  • EU-Switzerland: EU agreed on a 6 month grace period before Switzerland decides on compliance with EU rules (migration, social security, contribution to the EU’s budget, ruling of the European Court of Justice)

  • Strasbourg, France: Terrorist attack in the Christmas market with 3 people killed, 12 injured. Suspect was killed in a gun battle with police 2 days after the attack. Strasbourg is one of the three working places of European Parliament. French government urged the “Gillets Jaunes” protesters to refrain from protesting for the 5th straight weekend.

  • Cryptos: Total market cap at $102104bn, -2% w/w, -87% from January’s $821bn peak.

Major events of next week:

  • Wednesday’s Monetary meetings of the FED and the Central Bank of Sweden. Both are expected to raise rates.

  • Thursday’s Monetary meeting of BOJ and BOE. Both are expected to stay still.

  • Wednesday to Friday. China to lay down it’s economic policies for 2019


I would exit from my short EURJPY trades, at 127.20

Snapshot deteriorated:

  • 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 0.00% 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 increased to 2.4%

Strengths of JPY:

  • Japan voted in favor of easier immigration, helping the potential labor supply

  • 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: inflation, monetary base, retail sales, housing starts, industrial production, capital spending, industries activity, manufacturing PMI and sentiment readings

Weaknesses of JPY:

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


  • Wednesday’s Trade Balance

  • Thursday’s Monetary Meeting

  • Friday’s Inflation reading


I would go long AUDUSD at 0.7150

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 2.44% (+0bps w/w, -4bps w/w yield spread with the US 10y bonds)

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


  • two good news at the USA-China trade front (revised tariffs on US autos and purchases of US soybeans) are enough, in my book, to boost both CNY and AUD.

  • 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.

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


  • 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


  • Thursday’s Unemployment release

  • Next Monetary meeting on February 5


I would short USDCAD at 1.3435.

Snapshot unchanged:

  • 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 at0.1%, 10Y Government bonds yield at 2.10% (+2bps 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. The price discount over WTI was 37$ and now it it trimmed to 13$

  • OPEC+ recent decision to cut production combined with the decrease of US crude inventories for the second week in a row

  • I am expecting a rate hike at the next monetary 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:

  • considering technical analysis it is premature to take short positions.

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

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


  • Wednesday’s inflation readings, Thursday’s wholesale sales, Friday’s retail sales and GDP. All numbers are expected to favor the short USDCAD trade

  • Next Monetary meeting on January 9.



I keep my ground and favor short USD positions

The development of US yield curve over time can best be seen at this video, I have found in my feed. During the last week, there was a parallel shift of the curve, as the yields of the majority of the maturities increased by 1~4bps.

Snapshot unchanged:

  • Core PCE (=FED’s inflation compass) at 1.8%, CPI at 2.2%, 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 2.89%(+4bps w/w)

  • Unemployment at 3.7%

Strengths of USD – Risk off points:

  • geopolitical risk rising

  • deteriorating macro readings: retail sales coupled with increasing business inventory, Manufacturing PMI, Services PMI, home sales, consumer confidence, optimism

Weaknesses of USD -Risk on points:s

  • I do not buy the risk off argument

  • 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 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, personal spending and personal income increase


  • Tuesday’s Housing Market numbers and Wednesday’s Current Account

  • Wednesday’s Monetary Meeting. The probability of a rate hike is almost certain at 76.6% from 71.5% last week.

  • Friday’s Durable goods orders, GDP and core PCE reading



I would go long EURUSD at 1.1222 and 1.1115

Continuing confidence with increasing caution” is a zero value statement but it can summarize President Draghi’s remarks. GDP projections are slightly lower, stimulus is still needed over the medium term, ECB will no longer increase it’s balance sheet as QE ends, but the re-investment of expiring bonds will continue happening past the date of any rate hike.

Snapshot deteriorated:

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

  • GDP at 1.6%(OPEC ‘s expectations reduced further to 1.9%), 10y Bond yields of EFSF at -0.44(-13bps w/w), 10y German Bond yields at 0.25% (-6bps w/w), 10y Italian Bond yield at 3.16% (-7bps w/w, +29bps in 12 weeks), 10y Greek Bonds yields at 4.23% (-4bps w/w)

  • Unemployment at 8.1%

Strengths of EUR/USD:

  • Italy has proposed a revised budget deficit target of 2.04% vs the initial proposal of 2.4% that was already voted by the Lower House. Positioning in favor of a deal seems reasonable.

  • The EU-Japan trade deal, set to start materializing by the 1st of February, could potentially provide a much needed boost to EU’s GPD

  • improving macro readings: retail sales, M3, wage growth, German factory orders, industrial production, economic sentiment

Weaknesses of EURUSD:

  • Macron’s promises (i.e. cancellation of tax increases, 100EUR per month salary increases starting from 2019), addressing the “Gillets Jaunes” riots, would increase France’s deficit above the 3% threshold

  • 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, Manufacturing PMI, Services PMI,investor confidence,German Trade balance, European trade balance, current account, German industrial production


  • Monday’s inflation rate and trade balance, Thursday’s Current Account, Friday’s Consumer’s confidence

  • 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.

Prime Minister May, postponed the Tuesday’s vote as it was evident that she would lose it. On Wednesday, she survived the no confidence vote against her, triggered by her party. Following her latest visit in Brussels, it is evident that we are heading to a hard Brexit. Labor party is pushing for scheduling the postponed vote before Christmas.

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 1.25% (-2bps 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, M4,Construction PMI, average earnings, decreased actual inflation, lending to individuals, trade balance


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


  • Politics

  • Wednesday’s Inflation

  • Thursday’s Monetary Meeting and Retail Sales

  • Friday’s Current account and GDP


Issued by Labis Michalopoulos, CFA




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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