24 December-Issue 46

How the forecasts did:

The outcome of last week’s forecasts was mixed. On the one hand keeping the short EURJPY and USD index positions paid off, but on the other hand both long AUDUSD and short USDCAD trades are in the red. The long EURUSD call, was never triggered.

Major events of the last week:

  • COP24: The rule book to meet the Paris Climate Agreement was signed by 200 countries in Poland, last weekend.

  • China: China has not yet published it’s economic plans for 2019. Officials were signaling tax cuts and an easier monetary stance, but eventually a statement denied such rumours.

  • USA-China-EU: The USA with the UK, Germany, Canada, Australia and 8 other states, formally accused China of espionage. On Thursday, the USA indicted two Chinese hackers. Germany, eyeing Chinese investments, decided to scrutinize any foreign direct investment of more than 10% foreign stake. The previous threshold stood at 25% foreign stake.

  • Ukraine-Russia-EU-US: Russia moved attack jets to Crimea. US Sanctions on Russian Rusal (Aluminum producer) were lifted

  • USA: Trump ordered the withdrawal of US troops from Syria and Afghanistan, triggering Jim Mattis’, Secretary of Defense, resignation and opponent of the proposed collaboration with Russia on military matters.

  • Cryptos: Total market cap increased significantly to at $127bn, +26% w/w, -84% from January’s $821bn peak.

Major events of next week:

  • Enjoy the Christmas holidays with your family and friends! You need some perspective to commit to the art of making good analogies, i.e. investing.


No forecast.

Snapshot deteriorated:

  • 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 0.04%(+1bps w/w) vs BOJ’s target of 0.00±0.20% level

  • Unemployment at 2.4%

Strengths of JPY:

  • JPY is enjoying it’s safe haven status as equities are falling

  • 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: 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), inflation, unemployment, bank lending, household spending,Services PMI, M2, trade balance and current account


  • Wednesday’s inflation reading and Friday’s unemployment and retail sales

  • Next Monetary Meeting on 23 January


No forecast

Snapshot deteriorated:

  • 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 2.38% (-6bps w/w, +4bps w/w yield spread with the US 10y bonds)

  • Unemployment increased to 5.1% (expected to reach 4.75% by the end of 2020)


  • 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


  • 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: 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


  • No releases during the week

  • Next Monetary meeting on February 5


No forecast

Snapshot improved:

  • Inflation decreased to 1.9% (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 increased at 2.0% (vs. BOC expectations of 2.0% in 2018 and long term potential of 1.8%), GDP m/m at 0.3%, 10Y Government bonds yield at 2.03% (-7bps 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.

  • OPEC+ recent decision to cut production combined with the decrease of US crude inventories for the third 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, wholesale sales, retail sales, foreign securities purchases, corporate profits

Weakness of CAD:

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

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

  • deteriorating macro readings: GDP,, trade balance


  • No releases during the week

  • Next Monetary meeting on January 9.



No forecast.

Short USD index positions paid off as it is losing ground from safe havens JPY and CHF. At the same time, the USD is gaining versus AUD, CAD, CNY, RUB.

Equities have not found support at the -12% from its peak level and are free falling. At the same time, government bond yields continue to fall.


Snapshot improved:

  • Core PCE (=FED’s inflation target) increased to 1.9%, CPI at 2.2%, FED ‘s rate increased to 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%(-10bps w/w)

  • Unemployment at 3.7%

Strengths of USD – Risk off points:

  • geopolitical risk rising

  • the 3rd government shutdown of 2018 may prove to be the longest

  • deteriorating macro readings: GDP, current account, retail sales coupled with increasing business inventory, Manufacturing PMI, Services PMI, home sales, consumer confidence, optimism, personal spending growth and personal income growth

Weaknesses of USD -Risk on points

  • FED is communicating 2 rate hikes in 2019

  • 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. Latest CPI, core PCE and unit labor cost readings both fell.

  • Improving macro readings : Non-manufacturing PMI, durable goods orders, industrial production, consumer credit, consumer sentiment


  • No market moving releases are expected

  • Next Monetary Meeting on 30 January.



No forecast

Snapshot unchanged:

  • Annual CPI decreased to 1.9%, core CPI (=ECB’s compass) at 1.0%, ECB ‘s rate at 0.00%

  • GDP at 1.6%, 10y Bond yields of EFSF at -0.44%(+0bps w/w), 10y German Bond yields at 0.25% (+0bps w/w), 10y Italian Bond yield at 2.82% (-14bps w/w, +15bps since the start of Italian crisis 13 weeks ago), 10y Greek Bonds yields at 4.37% (+14bps w/w)

  • Unemployment at 8.1%

Strengths of EURUSD:

  • Italy reached a budget deal with the EU.

  • 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: current account, retail sales, M3, wage growth, German factory orders, industrial production, economic sentiment

Weaknesses of EURUSD:

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

  • 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,consumer confidence, German Trade balance, European trade balance, German industrial production


  • No market moving releases are expected

  • 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.

14-20January will be the date of the Parliament vote.

The European Court of Justice recently ruled that the UK has the right to unilaterally revoke its decision to withdraw from the EU.

New no confidence vote against Prime Minister May was requested by Labor Party, but the call was rejected.

Snapshot was mixed:

  • Inflation decreased to 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 1.32% (+7bps 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, retail sales


  • 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


  • Politics

  • No market moving releases are expected

  • 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.

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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