22 October-Issue 37

Saudis under World’s pressure

Last week report included forecast heating bulls eye (EURUSD and the way to trade the gap), two forecasts that look good (AUDUSD and EURJPY), two forecasts that are on the red (USDCAD is 12 pips on the red, USD did not continued heading south) and one forecast that was not triggered (the long AUDCAD call was missed by 25pips)

Major last week’s events:

  • China: China reported decreasing GDP growth at 6.5% (-0.2% from last reading) and Industrial production (-0.3% from last reading). On the other hand, during the same month China has also reported growing Trade Balance,M2, Foreign Direct Investments and falling unemployment.
  • Equities : So far, the announced earnings of big names like Goldman, Morgan Stanley, Alcoa, Netflix are beating expectations. Yet, US equities are failing to bounce from the 200Day moving average and head north.
  • EU deal with Asian Countries: EU singed a trade deal with Singapore. The positive effect that we experienced on July ’18, when the EU-Japan trade deal was signed, was not relived.
  • Saudi Arabia: The Jamal Khahoggi case (Saudi Arabian journalist that was most likely murdered in Saudi Arabian embassy in Turkey) is having an impact on US-Saudi Arabia relationship. Many executives, like Treasury Secretary Steven Mnuchin, Goldman Sachs executives, IMF executive Christine Lagarde, UK Trade Minister Liam Fox, will not attend this week’s Saudi Arabia’s conference. Saudi Arabia initially denied the death of Jamal Khahoggi and now admits it.
  • Cryptos: Total market cap at $209bn, +3.9% w/w, -74% from January’s $821bn peak, +12% from the $186bn September’s low.

Major next week’s events:

  • Central Bank of Canada (Wednesday), EU and Norway (Thursday) are having a monetary meeting

  • Friday’s scheduled revision of Italian debt, by S&P

  • Sunday’s final regional elections in Hesse, Germany


No forecast

Snapshot mixed – Arguments unchanged:

  • Core CPI (=BOJ’s compass) at 1.0% (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, 0.7% q/q, 10Y Government bonds yield at 0.15% (+0bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment at 2.4%

Strengths of JPY:

  • 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: GDP reading, inflation, unemployment, bank lending, retail sales, housing spending, housing market, capital spending and sentiment readings

Weaknesses of JPY:

  • I do not expect a continuation of the recent equity sell-off, that could further boost JPY

  • deteriorating macro readings: Manufacturing PMI,Services PMI, monetary base, M2, industrial production,trade balance and current account


  • Monday’s all industries activity, Wednesday’s Manufacturing PMI

  • Next Monetary Meeting on 31 October


No forecast

Snapshot deteriorated.

  • Inflation decreased to 2.2% (vs 2.5% target, BOC expects 2.0% within 1Q19), BOC rate at 1.50% (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 increased to 0.2%, 10Y Government bonds yield at 2.49(+0bps w/w).
  • Unemployment at 5.9%

Strengths of CAD:

  • improving macro readings: GDP, foreign securities purchases(new reading expected this week)

Weakness of CAD:

  • the latest inflation reading decreases the possibility of a Wednesdays’ rate hike

  • OPEC’s October report included a decrease of world’s demand growth, coupled with increasing supply and increasing inventory levels. The OECD inventory increase(14Mb increase of inventory over a month) is very small but enough to halt the increasing oil price scenario. Some inventory building up, is also found in USA for a second consecutive week
  • Demand shock driven by marine-time industry may happen on 2020 or even later
  • deteriorating macro readings: unemployment, housing market, wholesale sales, and retail sales


  • Monday’s Wholesale sales

  • Wednesday’s Monetary Meeting


I keep my long AUDUSD positions

Snapshot improved:

  • Inflation at 2.1% (expected at 1.75% later in 2018 and then higher in 2019), RBA ‘s rate at 1.50% (no hike so far)
  • GDP at 3.4% (RBA expects more than 3.0% within 2018 and 2019), 10y Bond yields at 2.71% (-3bps w/w)
  • Unemployment decreased to 5.0% (was expected to reach that level by 2020)


  • AUD is demonstrating a persuasive behavior during all latest equity sell offs.
  • Weekend’s by-election for the former PM’s seat: It seems almost inconceivable the liberal party could lose it. They are 17% ahead at the polls and are running their best funded campaign.
  • I expect Australian Household consumption to increase

  • improving macro readings: GDP, employment change, household consumption recovered in 3Q18, retail sales, trade balance, consumer sentiment


  • China’s latest GDP reading coupled with a USDCNY move towards 7.00 (now at 6.93). Note that at the latest Currency Report of US Treasury, China’s intervention was described as limited.

  • market participants expect the RBA’s rate to remain unchanged and not follow the rate hike schedule of other Central Banks
  • deteriorating macro readings: current account,company operating profits, decreasing capital expenditure, building approvals, home sales, home loans, business confidence


  • The outcome of the by-elections

  • Next Monetary Policy meeting on November 5



I would short USD at 96.10$

Snapshot unchanged:

  • Core PCE (=FED’s inflation compass) at 2.0%, CPI at 2.7%, FED ‘s rate increased to 2.25% (IOER) and expected to reach 3.1% within the cycle. FED’s view of long run rate at 2.9%
  • GDP at 2.9%y/y, 4.2% q/q, 10y Bond yields at 3.18% (+1 bps w/w)
  • Unemployment at 3.7%

Points to be considered

  • Equities: are not heading North following the testing of the 200 Day Moving Average.
  • inflation is not worrying. Latest releases showed decreasing numbers, labor cost data decreased & Trump canceled a 2.1% wage raise for federal employees. Yet inflation expectations are +0.1% higher than a month ago.
  • The combination of increasing wholesale and business inventories and decreasing retail sales is alarming
  • GDP, Manufacturing PMI, Non-manufacturing PMI, durable goods orders and housing market are all recording big numbers.

  • risk-on news like a EU-UK negotiations concluding, consensus with China, may simultaneously hit the headlines sending USD lower. I believe that the worse outcome of both topics is already priced.


  • Earnings:

Tuesday: Caterpillar, Visa, Verizon

Wednesday: Amazon, Boeing, Ford, Microsoft

Thursday: Google, GE, Twitter

  • Wednesday’s Manufacturing and services PMI

  • Friday’s GDP reading

  • Next Monetary meeting on November 8, following the Midterm Elections.


No forecast. Yet I am favoring long positions

Snapshot mixed:

  • Annual CPI at 2.1%, core CPI (=ECB’s compass) at 0.9%, ECB ‘s rate at 0.00%
  • GDP at 2.1% growth (OPEC reduced expectations to 2.0%), 10y Bond yields of EFSF at -0.35% (-10bps w/w), 10y German Bond yields at 0.42% (-7bps w/w), 10y Italian Bond yield at 3.71% (+11bps w/w, +87bps in 4 weeks), 10y Greek Bonds yields at 4.49% (+9bps w/w)
  • Unemployment at 8.1%

Strengths of EUR/USD:

  • Markets are only punishing European periphery bonds and not all European bonds

  • EUR has been unexpectedly strong during last two week’s equity sell-off.

  • excluding Italy, fiscal policies will not be as neutral as previously expected.

  • improving macro readings: wage growth, decreasing unemployment, private loans,German factory orders, industrial production, current account and trade balance

Weaknesses of EURUSD:

  • Italian bond yields are further increasing. On Friday, S&P credit agency will rate Italian debt and there is a chance of a downgrade

  • the different stages of monetary policy between EU and US, can only be simulated with another dip of EUR/USD in mid December. (the expected dip on late September has already happened, as I had noted at previous reports)

  • deteriorating macro readings: M3, retail sales, investor confidence and economic sentiment


  • Tuesday’s Consumer Confidence

  • Wednesday’s Manufacturing and Services PMI, M3 and Private Loans

  • Thursday’s Monetary Meeting


No forecast for GBP.

The question of last week was what will happen at the EU summit and if an extra summit would be scheduled for November. Noting that I have done little research on the subject, I can’t imagine that the Irish border, the last unresolved issue, could result in a no deal. Yet, no extra summit was scheduled.

Snapshot improved Arguments unchanged:

  • Inflation decreased to 2.4% (vs 2.0% target), BOE ‘s rate at 0.75%
  • GDP at 1.2% growth (vs 1.75% BOE’s expectations and 1.3% decreased OPEC’s expectations), 10y Bond yields at 1.54% (-8bps w/w)
  • Unemployment at 4.0%


  • positive macro releases: Services PMI and Manufacturing PMI, average earnings, decreased actual inflation


  • a no deal with EU is possible. In this case UK would be able to be competitive to EU regulatory wise, but would loose tax revenues from the decrease of financial activity in the City.
  • the no deal scenario has already been characterized as bad outcome by Mark Corney (Governor of BOE) and has been quantified to be equal to a £80bn in public finance by Philip Hammond (Head of Treasury)
  • Negative macro releases:GDP m/m, Manufacturing production, construction output, consumer’s confidence, current account, industrial order expectations, retail sales


  • UK politics and negotiation process

  • Next Monetary Meeting on 1st of November.



Issued by Labis Michalopoulos, CFA




To help speed reading green is used for numbers that have a risk on effect, red is used for numbrtd 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, and my reaction to the mistake was a series of new wrong actions.

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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