#50_Stew alone or follow the Swedes example?

See you in Davos!

12 minutes read report, 9 pages

How the forecasts did:

Our last week’s forecasts were too conservative to be triggered. We have been at the correct side of all moves (long EURJPY, long AUDUSD, short USDCAD, avoiding short USD trades, short EURUSD) but we have recorded zero returns.

Major events of last week:

  • USA-China: A WSJ article, written by Bob Davis, informed us that Mnuchin is proposing the lifting of US 2018 tariffs as a negotiation tactic to make Chinese change their technology transfers and IP policies. Lighthizer rejects this proposal. Nevertheless, the title of the article was enough to create a 30 minutes risk-on mode in global markets. Canadian ambassador in China, briefed Canadian Parliament. Canada issued a travelling warning on China
  • USA: The government shutdown continued for a 4th week.
  • China: Another short lived story was that of a cotton seed reported to have successfully been planted and sprouted on the Moon by the Chinese. Yet, a new report revealed that the cotton seed did not survive the -170C temperature during the night.
  • China-Taiwan: Taiwan began military drills. Taiwanese reject the possibility of reuniting with China.
  • Turkey-Syria-USA-Russia: Mike Pompeo, US Secretary of State, summarized the situation as follows “A disorderly Middle East and an American Public unwilling to bear its burdens”. R.T. Egdogan, Turkish President, spoke to President Trump over the phone stating that Turkey will support the USA as they prepare to leave Syria. He further met with the Republican US Senator Lindsey Graham in Ancara on Friday.
  • UK: The deadlock continues. Brexit deal was rejected yet, the government of Teresa May survived a no-confidence vote
  • USA-North Korea: A second Trump-Kim Jong Un summit is being scheduled.
  • Sweden: In took the Swedes 5 months to form a government. Older alliances have been broke. Social Democrats(28.6% of seats) & Greens (4.5%) & Center Right(8.8%) & Liberals(5.7%) support a minority government. Moderates (20%) & Christian Democrats (6.3%) disapprove. Left Party (8%, former communists) neither support nor disapprove. White Suppremacists (17.7% of seats) are not included in the arc.
  • Cryptos: Total market cap at $125bn, +2.46% w/w, -85% from January’s $821bn peak.
  • A suicide bombing near the Turkish-Syria border, killed 19 people, including 4 Americans. The incident indicates that it is premature to declare the defeat of ISIS.
  • The USA opens a criminal case against Huawei.

Major events of next week:

  • Monetary policy meetings of the Norwegian Central Bank and the Bank of Japan on Wednesday. ECB meets on Thursday.
  • World Economic Forum in Davos begins on Tuesday.


Long EURJPY at 123.19

Snapshot deteriorated:

  • Core CPI (=BOJ’s compass) decreased to 0.7% (2.0% target), CPI decreased to 0.3%, 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:

  • Equities are about to test technically significant levels and a correction is possible. JPY would act as a safe haven in this scenario.
  • 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:

  • Macro readings of Japanese Economy are pointing to a recession with decreasing inflation
  • 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


  • Manufacturing PMI, BOJ core CPI
  • Wednesday’s Monetary Meeting


Long AUDUSD at 0.7112 and 0.7072

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 2.31% (+1bps w/w, -8bps 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. Inflation expectations stand at 3.5%
  • improving macro readings: GDP, retail sales, employment change, M1, household consumption recovered in 3Q18, wage price index,consumer’s sentiment


  • 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. Yet consumer sentiment is improving.
  • Australia is having a minority government and RBA signals no rate hike. Elections are scheduled for May
  • deteriorating macro readings: trade balance, inflation expectations, construction activity, home sales, home loans, current account,company operating profits, decreasing capital expenditure, building approvals, private capital expediture, business confidence


  • New home sales and unemployment
  • Next Monetary meeting on February 5


Short USDCAD at 1.3398

Snapshot improved further:

  • Inflation increased at 2.0% (BOC was expecting to see this number by the end of 2019), BOC rate at 1.75% (4 hikes in the cycle, neutral rate according to BOC within 2.5%~3.5% range).
  • GDP 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 2.04% (+8bps w/w).
  • Unemployment at 5.6%

Strengths of CAD:

  • Federal cabinet shuffle happened on 14 January, 9 months before the October’s elections. The Foreign affairs, Natural resources and Energy Ministries remained unchanged. The resigned Treasurer has been replaced with Jane Phipott. A Rural Economic Development Ministry has been created and there were new Justice, Veteransa and Indigenous Ministers.
  • OPEC+ recent decision to cut production combined with the decreasing US crude inventories for the 7th week in a row, are sending oil higher. No downward revision of future oil demand growth has been made by OPEC.
  • improving macro readings: GDP, inflation, 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:

  • The bottleneck for Canadian oil delivery remains. Keystone XL and Trans Mountain pipelines are stalled. Enbridge Line 3 is expected to be delivered by the end of 2019. OPEC noted the decreasing Canadian production at the latest monthly report
  • oil demand shock driven by maritime industry may happen on 2020 or even later.
  • deteriorating macro readings: trade balance, Manufacturing PMI


  • Retail, Manufacturing and Wholesale Sales
  • Next Monetary meeting on March 4. I am expecting a rate hike.


Avoiding short USD positions during the last week, was a correct thing to do. This week, shorting USDindex at 96.30 is tempting.

Snapshot unchanged:

  • Core PCE (=FED’s inflation target) at 1.9%, CPI at 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 2.79%(+9bps w/w)
  • Unemployment at 3.9%

Strengths of USD – Risk off points:

  • Last week, I had noted that I cannot imagine a shutdown continuing beyond January 19. So far, the shutdown subtracts -0.12% of GDP growth in 4Q18, -0.06% in 1Q19, adds +0.18% in 2Q19 and distorts both Government spending and Unemployment releases. In a few hours from the distribution of this report, at15.00 EST / 20.00GMT/22.00EET, President Trump will address the nation from the White House and could prove me right.
  • deteriorating macro readings: GDP, inflation, current account, retail sales coupled with increasing business inventory, Non-manufacturing PMI, Manufacturing PMI, consumer credit, optimism, consumer sentiment

Weaknesses of USD -Risk on points

  • Trade tensions are on track to be resolved.
  • Last week’s bank earnings of Bank of America and Goldman Sachs managed to mix the sentiment away from the disappointing earnings of Citigroup, Morgan Stanley and JP Morgan.
  • FED communicated 2 rate hikes during 2019 but markets are currently pricing no rate hike. On December’s meeting there is a 28.1% probability of the first 2019 hike(from 4.5% the previous week).
  • 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, average earnings, Vehicles sales, home sales, capacity utilization rate


  • Manufacturing and Service PMI.
  • Next Monetary Meeting on 30 January.


Long EURUSD at 1.1321 and 1.1210.

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 -0.31%(+21bps w/w), 10y German Bond yields at 0.26% (+8bps w/w), 10y Italian Bond yield at 2.78% (-13bps w/w) 10y Greek Bonds yields at 4.18% (-12bps w/w)
  • Unemployment at 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.
  • The “Gillets Jaunes”protests are losing momentum. On the 10th week of protests, France police counts 27K protesters far less than the 300K protesters of Mid-December.
  • improving macro readings: trade balance, unemployment, retail sales, German Trade balance, wage growth, industrial production, economic sentiment, private loans

Weaknesses of EURUSD:

  • 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 German Airports continued.
  • deteriorating macro readings: GDP, inflation, Services PMI, current account, investor confidence,consumer confidence, German factory orders, German industrial production, M3


  • Economic sentiment, consumer confidence, Manufacturing and Services PMI
  • Thursday’s Monetary Meeting of the ECB.


No forecasts for GBP

We are 10 weeks away from the deadline of Article 50 and the most probable scenario is the extension of the deadline up until July and a new referendum. The Comedian John Oliver summarizes the situation brilliantly in the bellow 40 seconds video.


Snapshot improved:

  • Inflation decreased to 2.1% (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 1.35% (+6bps 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 inflation, lending to individuals, trade balance, construction output


  • political deadlock
  • the ongoing uncertainty is already evident at macro readings, and could drag on until July.
  • 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.
  • 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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