26 November-Issue 42

“We stay with Saudi Arabia”

It ‘s been a poor week for my forecasts with 1 out of 5 correct calls. Closing long EURJPY trades was right. On the other hand shorting EURUSD at 1.1521 was not triggered, buing AUSUSD is 40 pips in the red, selling USDCAD is 1 pip at the green and USD strengthened by 0.40$.

I keep favoring a risk-on scenario and firmly believe that the G-20 meeting, scheduled for the next weekend, will mark the start of a December’s rally.

Major events of last week:

  • UK: A confidence vote against May has not happened. Spain could veto the draft EU-UK deal over Gibraltar

  • APEC summit: The APEC summit ended with no common statement for the first time since 1993. The exact wording regarding reforms of the WTO was the source of disagreement between Chinese and Americans

  • USA-China: The update on China’s practices related to tecnology transfers, issued by the executive office of the US president on Tuesday, can be regarded as promishing. China has already eased it’s framework for foreign investements on crops, autos, commercial aircrafts, mapping and surveying services. On the other hand, China continues demanding control on investements in oil&gas, nuclear power and telecom. The broad range of internet and technology-related investements, that are clasified under the ubrella of value added telecom services, need to adhere to China’s commitments against the WTO.

  • Saudi Arabia: Relations with the USA are uneaffected, as specifically stated by Trump.

  • N.Korea: Scheduled military drills of USA and South Korea for 2019 are scaled down.

  • Cryptos: Total market cap contraction continues to $139bn, -24% w/w, -83% from January’s $821bn peak

Major events of next week:

  • Tuesday’s OPEC meeting

  • Friday’s and Saturday’s G-20 meeting. A better modus vivendi between USA and China is expected that would trigger the risk on sentiment


No forecast for EURJPY

Snapshot and arguments unchanged:

  • Core CPI (=BOJ’s compass) at 1.0% (2.0% target,expects 1.2~1.3% within 2018), BOJ rate at -0.1%

  • GDP at 0.30% annual, -0.3% q/q, 10Y Government bonds yield at 0.10%(+0bps w/w) vs BOJ’s target of 0.00±0.20% level

  • Unemployment at 2.3%

Strengths of JPY:

  • The new agreement signed with China

  • 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:, inflation, unemployment, capital spending and sentiment readings

Weaknesses of JPY:

  • deteriorating macro readings: GDP reading (which is expected to decrease in 2019), bank lending, housing spending, retail sales, manufacturing PMI, housing starts,Services PMI, M2, industrial production,trade balance and current account, all industries activity


  • Monday’s Manufacturing PMI, Tuesday’s inflation, Thurday’s retail sales, Friday’s Industrial production and consumer confidence

  • Next Monetary Meeting on 20 December


No forecast for USDCAD.

Before commiting to additional short USDCAD trades, given the strenghthening of the Canadian economy, oil needs to stop falling.

Snapshot improved.

  • Inflation increased to 2.4% (vs 2.5% 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 at 0.1%, 10Y Government bonds yield at 2.35% (-1bps w/w).

  • Unemployment at 5.8%

Strengths of CAD:

  • The OPEC’s meeting in Abu Dhabi confirmed that current level of conformity to agreed production cap stands at 104% and the need to address the fact that 2019 points to greater supply growth than expected demand growth. Decisions are expected at the next meeting in Vienna, on December 6.

  • investment indicator rebounded to a high level, following the recent USMCA deal

  • improving macro readings: unemployment, trade balance, building permits, Ivey PMI (index constructed from survey of purchase managers), manufacturing sales, foreign securities purchases, corporate profits

Weakness of CAD:

  • oil prices failed to find support at the technically significant level of 64$. Demand growth is slowing and US inventory levels rised for the 9th week in a row.

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

  • deteriorating macro readings: GDP, Manufacturing PMI, wholesale sales and retail sales


  • Tuesday’s OPEC meeting

  • Thurday’s Current Account and Friday’s GDP

  • Next Monetary Meeting on 5 December


I keep my long AUDUSD positions.

AUD is currently moved by the will of Chinese interventions and the development of China-USA trade talks. Any news in the direction of a trade deal to be signed at the next G20 meeting on 30th of November, favors AUDUSD. The absence of such news pushes AUDUSD lower.

Snapshot and arguments unchanged:

  • Inflation at 1.9% (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 updated expectation to 3.5% within 2018 and 2019), 10y Bond yields at 2.65%(-3bps w/w, -2bps w/w yield spread with the US 10y bonds)

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


  • RBA has not commited a rate hike in the cycle. On the other hand, a rate hike is possible within April 2019 and Australian banks are already increasing their lending rates.

  • I expect Australian Household consumption to increase

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


  • Australia is having a minority government

  • deteriorating macro readings: inflation expectations, home loans, construction activity, current account,company operating profits, decreasing capital expenditure, building approvals, retail sales


  • Thursday’s new home sales and private capital expediture

  • Friday’s Manufacturing and Non-manufacturing PMI of China

  • Next Monetary Meeting on 4 December



I keep my ground and favor short USD positions

Snapshot unchanged:

  • Core PCE (=FED’s inflation compass) at 2.0%, CPI at 2.5%, 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 3.05%(-1bps w/w)

  • Unemployment at 3.7%

Strengths of USD – Risk off points:

  • Equities recorded another sell off

  • deteriorating macro readings: Manufacturing PMI, Non-manufacturing PMI

Weaknesses of USD -Risk on points:

  • Stronger USD does not help neither equities nor US economy

  • inflation is not worrying. Despite the latest increasing CPI reading, labor cost data decreased & Trump canceled a 2.1% wage raise for federal employees.

  • risk-on news like a EU-UK negotiations concluding, consensus with China, and a modus vivendi between EU and the Italian government may simultaneously hit the headlines sending USD lower.

  • Improving macro readings : GDP, Services PMI, durable goods orders, retail sales, and housing market


  • Wednesday’s GDP and Goods Trade balance

  • Thursday’s inflation readings and minutes of latest monetary meeting

  • Next Monetary Meeting on 19 December. The propability of a rate hike increased to 74.1% from 65.4% on17 November and 75% on 12 November



I would buy EURUSD at 1.1197

Snapshot unchanged:

  • Annual CPI at 2.2%, core CPI (=ECB’s compass) at 1.1%, ECB ‘s rate at 0.00%

  • GDP at 1.7%(OPEC ‘s expectations reduced further to 1.9%), 10y Bond yields of EFSF at -0.46%(-15bps w/w), 10y German Bond yields at 0.34% (-3bps w/w), 10y Italian Bond yield at 3.41% (-8bps w/w, +61bps in 9 weeks), 10y Greek Bonds yields at 4.55% (-2bps w/w)

  • Unemployment at 8.1%

Strengths of EUR/USD:

  • inflation is peaking up (new reading is expected on Friday)

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

  • improving macro readings: inflation, M3, wage growth, German factory orders, industrial production

Weaknesses of EURUSD:

  • The German Economy reported negative GDP q/q growth

  • The Italian budget drama is prolonged. The most probable scenario is that Italy will be placed in the Excessive Debt Procedure by EU and any change of Italian budget will be made after the European elections in May 2019

  • Structural reforms, like the European Deposit Insurance Scheme, the creation of a macroeconomic shock absorber mechanism that would issue short term loans to European governments that are having troubles, could further be postponed

  • EU economy is loosing momentum and the automobile sector is having troubles

  • 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: GDP, Manufacturing PMI, Services PMI, retail sales, investor confidence and economic sentiment, German Trade balance, European trade balance, current account


  • Monday’s business climate, Wednesday’s M3, Friday’s inflation and unemployment reading. The latest releases are expected to be possitive, sending EUR higher

  • Next Monetary Meeting on 13 December


No forecast for GBP as we are heading to Sunday’s EU summit that currently could be called off by Spain, over Gibraltar.

Snapshot 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% decreased OPEC’s expectations), 10y Bond yields at 1.3841% (-3bps w/w)

  • Unemployment at 4.1%


  • during the latest press conference of BOE, it was revealed that without Brexit uncertainty, BOE would have think more of rising rates

  • positive macro releases: Construction PMI, average earnings, decreased actual inflation, lending to individuals, trade balance


  • Carney’s, the governor of BOE, argued that there will be a supply shock in case of a disorderly Brexit

  • current draft deal covers EU-UK relation up until 20XX, witch was specified to be the end of 2020. Future trade relations will be defined later in the future, so a discount for uncertainty remains

  • 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.

  • Negative macro releases: GDP m/m, unemployment, M4,Service PMI, Manufacturing production, Manufacturing PMI, construction output, consumer’s confidence, current account, industrial order expectations, home prices, retail sales


  • UK politics and negotiation process

  • Tuesday’s realized sales and Thursday’s consumer confidence.

  • Next Monetary Meeting on 20 December


Issued by Labis Michalopoulos, CFA




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.

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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