27 August-Issue 29

Australian Drama

My last week’s stance and forecasts played well. The core trades to short USD, keep open my long EURUSD position at 1.1510, and to go long AUDUSD at 0.7281 are paying off. The intentions to go long EURJPY at 125.10, short USDCAD at 1.3150 and long GBPUSD at 1.2550 were not triggered. Yet, the direction of all three trades was correct.

Major last week’s events:

  • Tariffs front: US tariffs were expanded this week to encompass 50B$ worth of Chinese imports up from 34B$. The move triggered a Chinese retaliation of equal magnitude. A third wave of tariffs on 200B$ worth of goods is in the making. Note that the latest trade talks between the countries’ officials took place on the same day and have been described as constructive by the Chinese, but were downplayed by the Americans.
  • NAFTA: negotiations between USA and Mexico have not yet been concluded.
  • US Transformation: As three men of Trump’s human shield pleaded guilty, found guilty or just turned over him (Cohen, Manafort, Pecker), an impeachment cannot be ruled out.
  • Turkey: no news hit the headlines
  • Iran,Syria, North Korea: Two new summits between Moon (S. Korea) and Kim (N. Korea) and between Trump and Kim are being discussed. The meeting of Merkel (Germany) and Putin (Russia) on Ukraine,Syria and North Stream2 had no concrete outcome.
  • Cryptos: Total market cap at 215B$, -2% w/w, -74% from the 800B$ peak. The week included an anticipated negative decision of the SEC on a Bitcoin ETF.

Major next week’s events:

  • Nothing to note


I am closing my long EURJPY trades and search to short the pair at 129.94 level

Snapshot unchanged:

  • Core CPI (=BOJ’s compass) at 0.8% (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, 0.5% q/q, 10Y Government bonds yield at 0.10% (+0bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment at 2.4%

Strengths of JPY:

  • I expect US equities dropping from current highs and pushing JPY higher

  • QQE will stay, up until core CPI reads 2.0% in a stable manner. The scheduled VAT hike on Oct’19, rules out any possible monetary policy change, earlier than 2020.

  • increasing retail sales, improved GDP reading, trade balance, increased Manufacturing PMI

Weaknesses of JPY:

  • decreased readings of Services PMI, monetary base, household spending, bank lending, machine orders and Trade balance


  • Tuesday’s inflation reading

  • Friday’s Unemployment rate, m/m Industrial Production and y/y Housing starts

  • Next Monetary Meeting on 19 September


I will short USDCAD in the event 1.3132 level is triggered

Snapshot unchanged:

  • Inflation at 3.0% (vs 2.5% target), BOC rate at 1.50% (4 hikes so far, neutral rate according to BOC within 2.5%~3.5% range).

  • GDP at 2.3% (vs BOC expectations of 2.0% in 2018 and long term potential of 1.8%), 10Y Government bonds yield at 2.26% (-1bps w/w)

  • Unemployment at 5.8%

Strengths of USDCAD, weakness of CAD:

  • latest disappointing housing market, wholesale sales and retail sales readings

Weaknesses of USDCAD, strengths of CAD:

  • OPEC’s latest report showed the oil market is balanced and oil prices should head north. Eventually oil prices began strengthening last week.

  • Increased inflation gives enough reasons for a rate hike in two weeks

  • strong GDP, trade balance, retail sales and unemployment readings

  • Canada is waiting Mexico and the USA to finalize their deal, to re-enter NAFTA negotiations


  • Wednesday’s current account and Thursday’s GDP reading

  • Next Monetary Meeting on 5th of September.


Since August 6th I was noting that the political landscape in Australia has changed. I was not expecting last week’s drama when the Prime Minister was changed.

The current government has a 1 seat majority (76 out of 150 seats) supported by 60 Liberals and 16 Nationals. Based on the political pressure of Nationals, a right-wing Liberal (Dutton) was trying to become PM accusing the former PM (Turnbull) of being too leftish. At the end, another moderate (Morrison) became PM and everyone is now calling for stability.

I am entering long at 0.7300 AUD/USD targeting 0.7460

Snapshot unchanged:

  • Inflation at 2.1% (vs 2.0~3.0% target, and expected to decline during 3Q18), RBA ‘s rate at 1.50% (no hike so far)

  • GDP at 3.1% (RBA expects more than 3.0% within 2018 and 2019), 10y Bond yields at 2.55% (+0 bps w/w)

  • Unemployment at 5.3% (expected to reach 5.0% by 2020)


  • In my book, latest political drama is over. PM change was demanded by people opposing tax cuts and National Energy Guarantee policies. At the end the new PM and Deputy were the architects of both.

  • significant increase of GDP, inflation expectations and wage price index

  • improved business confidence & profits, private capital expenditure, building approvals, new home sales (new releases expected this week) and latest impressive increase of consumer sentiment


  • Market participants expect the rates to remain unchanged for a considerable period of time

  • an increased trade balance is not expected in the near future


  • Apologies to my readers for failing to understand the importance of the noted political landscape change, and for only including it in the weaknesses section and not at the watch list section.
  • Wednesday’s New Home sales m/m and Thursday’s Building approvals

  • Next Monetary Meeting on 4th of September



FED’s minutes included 3+1 points I want to stress. (a) EU-US deal helped equities (b) GDP is expected to slow (c) downward revision of energy prices (d) the decreased unit labor cost data
(-0.9% q/q from +2.9%) were not available during the latest meeting. This was only mentioned in a parenthesis and escaped market attention.

As SP500 closed the week at 2873, exactly the same level as the highest point reached before February’s downtrend, I am puzzled to find what would fuel a crossing of this level

I change my outlook and I would go long USD-short US equities

Snapshot unchanged:

  • Core PCE (=FED’s inflation compass) at 1.90%, FED ‘s rate at 1.95% (IOER) and expected to reach 3.1% within the cycle. FED’s view of long run rate at 2.9%

  • GDP at 2.8%y/y (OPEC expects 2.9% for 2018), 4.1% q/q, 10y Bond yields at 2.83% (+3 bps w/w)

  • Unemployment at 3.9% (vs natural rate of unemployment of 4.5%), FED expects 3.6% unemployment in 4Q18 and 3.5% for 2019 and 2020.

Strengths of USD:

  • a possible equity downtrend from current highs would help USD

  • a rate hike in September is almost certain. No one is paying attention to the decreased unit labor costs.

  • strong macros: GDP reading, Manufacturing and services PMI are all expected to decrease but remain high.

Weaknesses of USD:

  • 10y Government Bond yields remain below 3.0%.

  • low industrial production reading and durable goods orders.


  • Tuesday’s wholesale inventories. An increasing number would favor an equities downtrend

  • Wednesday’s GDP q/q reading. I expect a lower than 3.9% reading that favors my short equities-long USD scenario

  • Thursday’s inflation readings

  • Next Monetary Meeting on 26 September, when a new hike is expected.



I am exiting my long trades at 1.1640

Snapshot unchanged:

  • Annual CPI at 2.1%, core CPI (=ECB’s compass) at 1.1%, ECB ‘s rate at 0.00%

  • GDP increased to 2.2% growth (OPEC reduced expectations to 2.0%), 10y Bond yields of EFSF at -0.40% (-2bps w/w), 10y German Bond yields at 0.34% (+3bps w/w), 10y Italian Bond yield at 3.15% (+3bps w/w), 10y Greek Bonds yields at 4.60 (-12bpd w/w, at the first week following bailout protection)
  • Unemployment at 8.3%

Strengths of EUR/USD:

  • increased GDP, inflation, decreasing unemployment

  • M3 growth (new reading on Tuesday), service and manufacturing PMI levels are still above the 50 threshold, but decreasing

Weaknesses of EUR/USD:

  • the pair is in the middle of 1.1514~1.1829 range and I expect that the uptrend will loose steam as new data are released

  • divergence of monetary policy between EU and US, that can only be simulated with two expected down facing waves of the pair, on late September and mid December

  • a possible retrace of US equities

  • Italy


  • Monday’s German Business Climate

  • Tuesday’s M3 and Private loans. Decreasing number do not favor EUR.

  • Friday’s inflation and unemployment readings. Neither of the above readings are expected higher, fueling the further increase of EUR.

  • Next Monetary Meeting of ECB on 13th of September.


I stand my ground that the UK will find a productive way to finalize it’s relations with the EU. Nevertheless, I would avoid offering any forecasts for GBP as we are approaching to November’s deadline and any comment from UK or EU politicians is able to move the market.

A compromise between the UK having a competitive regulatory framework against the EU’s regulations and being able to contain the lower tax revenue s from its financial institutions loosing their EU pass, is what is really at stakes.

Snapshot unchanged:

  • Inflation at 2.5% (vs 2.0% target), BOE ‘s rate at 0.75%

  • GDP at 1.3% growth (vs 1.75% BOE’s expectations and 1.3% decreased OPEC’s expectations), 10y Bond yields at 1.27% (+3bps w/w)

  • Unemployment at 4.0%


  • the bad weather narrative for Q1 still makes sense.

  • Macro picture is improving (GDP, unemployment, construction activity and housing market). On top, inflation increased proving that BOE was correct to hike.


  • the August 23rd release of 80 technical notices by the UK Government for the Pharmaceutical industry and Intellectual property procedures, in the event of a no-deal Brexit reveals that a hard Brexit is possible. On the other hand, the content of the notices reveals that any transition will be smooth.
  • decreased average earnings and industrial order expectations

  • latest Manufacturing and Services PMI that were decreasing


  • UK politics

  • Monday is a holiday

  • Thursday’s M4 reading is expected to increase and would favor long GBP positions

  • Friday’s consumer confidence that is expected low and does not favor GBP

  • Next Monetary Meeting on 13th of September


Issued by Labis Michalopoulos, CFA




People checking my returns at www.forexfactory.com/dxmix will notice a leveraged trade on AUDUSD opened on 24 August that ruined my statistics. 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.

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 acted 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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