#51_Davos Take aways

Rule based international order is not for granted. WTO changes to be addressed.

There are no experts for the future, only experts for yesterday.

12 minutes read report, 9 pages

How the forecasts did:

It’s been a good week for my forecasts. 3 out of 5 are paying off (long AUDUSD, short USD, long EURUSD), the rest 2/5 were not triggered (EURJPY, USDCAD). Nothing is in the red. The USD short trade at 96.30 was extremely accurate, just 6 cents (or 3 spreads) below the highest bid of the week. The second advised level for the long AUDUSD trade at 0.7072 was only 5pips above the lowest ask price of the week.

I am expecting a continuation of Friday’s moves.

Major take aways and events of last week:

  • IMF: The most valuable insights from the IMF’s projection of global GDP growth for 2019 of 3.5% (-0.2 revision since October) were their poor assumptions. The IMF assumed trade tariffs increase in January (which did not happen), Brexit happening in an orderly fashion within March (unlikely) and does not take into account the recent Chinese corporate tax cuts and the decrease of Chinese banks’ required liquidity ratio. Oil price assumptions (55~60$) were nothing more that the future price of oil at the time when the report was produced.

  • Davos: President Abe’s address in Davos emphasized the need to change WTO rules on government subsidies (pro USA position) and the need for “Data Free Flow with Trust”. Chancellor Merkel, supported the need to re-calibrate international multilateral bodies so that they reflect the current global balance of power. (pro China position).

  • USA: Trump sighed a bill to temporally reopen the government for 3 weeks.

  • China-Taiwan: China sent several bombers and aircraft through the Bashi Channel, which separates Taiwan from the Philippines. The USA has sent two warships through the Taiwan Strait.

  • Venezuela:The USA recognized Juan Guaido, as the legitimate president. The move was supported by Canada, Argentina, Brazil, Chile, Peru, Colombia Equador, Paraguay. On the other hand China, Russia, Turkey, Cuba and the Venezuelan military commanders are backing Maduro. US diplomats are given a deadline to leave the country. 350 people have been detained, 20 people have been killed.

  • Cryptos: Total market cap at $120bn, -4.0% w/w, -85% from January’s $821bn peak.

Major events of next week:

  • Liu He, China’s head of negotiations, will visit Washington on Wednesday. He will meet Lighthizer and Mnuchin. Zeroing the trade deficit by 2024 with huge purchases of american agricultural products, denying financing access, like bond issuing, to companies caught stealing IP, focusing on trademark enforcement cases, are some of Chinese proposed concessions. China has already got rid of the requirement to hold the majority interest in Joint Ventures formed with foreign companies, in several sectors (see the 42nd 26 November issue). In the meantime, China blocked Microsoft’s Bing, the last foreign search engine accessible to the Chinese public.

  • Wednesday’s Monetary policy meeting of the FED. Jerome Powell will be able to alleviate fears of a further tightening within 1H2019.

  • A new 5year, 2~3bnEUR Greek Government bond could be issued.


Long EURJPY at 124.53

Snapshot unchanged:

  • Core CPI (=BOJ’s compass) at 0.7% (vs 2.0% target and BOJ’s downward revision of core CPI at 1.1%), CPI at 0.3%, BOJ rate at -0.1%
  • GDP at 0.00% annual (BOJ expects 0.9% growth in 2019), -0.6% q/q, 10Y Government bonds yield at 0.00%(-1bps w/w) vs BOJ’s target of 0.00±0.20% level
  • Unemployment at 2.5%

Strengths of JPY:

  • the swap agreement signed with China and the trade agreement with EU to come into force within 1st February.
  • Reforms increasing potential GDP: (i)rules promoting the acceptance of foreign workers, increasing women participation and elders participation (ii) incentives for free education programs starting from October 2019 (iii) Production of hydrogen is a defined goal of Japan for 2050 (iv) introduction of two obligatory independent board of directors in Japanese corporations (v) corporate tax reform.

  • Japan has a debt burden of 250% of GDP. The number drops to 152% excluding the debt owned by Japanese Government entities, and drops to 60% excluding the debt owned by the Bank of Japan. Debt to GDP held by the private sector or international holders is only 60%.

  • Japan’s GDP growth is very moderate. Yet, GDP per capita growth stands at 0.65%, which is one of the highest numbers in the developed world.

  • QQE will stay, up until core CPI reads 2.0% in a stable manner. The scheduled consumer’s tax hike in Oct’19 (from 8% to 10%), rules out any possible monetary policy change, before 2020.
  • improving macro readings: current account (+20%), bank lending, housing starts,capital spending, industries activity,

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, industrial production, monetary base, sentiment readings, manufacturing PMI


  • Retail sales, Unemployment, Housing starts, Industrial production

  • Next Monetary Meeting on 15 March


Long AUDUSD at 0.7156 and 0.7111

Snapshot improved:

  • 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 2.21% (-10bps w/w, -7bps w/w yield spread with the US 10y bonds)
  • Unemployment decreased to 5.0% (expected to reach 4.75% by the end of 2020)


  • China’s Economy: China’s GDP growth is slowing. Imports, exports, vehicles sales fall. Yet, this can be attributed to deleveraging efforts China is pursuing. Latest release of Current Account was negative as China becomes a consuming nation. The regime is adequately responsive with corporate tax cuts, decrease of policy rates and capital reserve requirements. Chinese corporate debt is huge. During the last decade global corporate debt increased by $29T ($10T increase in Developed Economies, $15T increase in China). Nevertheless, it is mainly denominated in CNY (95% of total) and held by Chinese (90% of total). NPLs stand at 2% but can also be calculated at 24% if we account hidden local government debt.

  • 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, unemployment, M1, service PMI, 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, manufacturing PMI, construction activity, home sales, home loans, current account,company operating profits, decreasing capital expenditure, building approvals, private capital expediture, business confidence


  • inflation, private sector credit

  • Next Monetary meeting on February 5


Long USDCAD at 1.3117

Snapshot unchanged:

  • Inflation 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 1.98% (-6bps w/w).
  • Unemployment at 5.6%

Strengths of CAD:

  • Oil consumption: So far, the 500million electric cars are only reducing oil demand by 50Kbarrels per day, while total oil demand increase is 1.3Mbarrels per day. Electric cars are not a game changer, as we like to think. On the other hand, Asia is just starting to fly.

  • 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.

  • No downward revision of future oil demand growth has been made in the OPEC’s January report.

  • improving macro readings: GDP, inflation, current account,unemployment, building permits, Ivey PMI (index constructed from survey of purchase managers), foreign securities purchases, corporate profits

Weakness of CAD:

  • the impact of shale oil in not yet well felt according to Fatih Birol, Executive director of International Energy Agency

  • 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. Latest week on week, US crude oil inventories increased significantly. It was the first rise since November.
  • deteriorating macro readings: trade balance, Manufacturing PMI, manufacturing sales, wholesale sales, retail sales


  • GDP and Manufacturing PMI

  • Next Monetary meeting on March 4. I am expecting a rate hike.


Short USDindex at 95.66 and 95.98.

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 2.76%(-3bps w/w)
  • Unemployment at 3.9%

Strengths of USD – Risk off points:

  • a puzzling fact of last week, has been the significant increase of gold prices the same time that equities and forex market was in a risk-on mode

  • deteriorating macro readings: GDP, inflation, current account, retail sales coupled with increasing business inventory, Non-manufacturing PMI, Service PMI, consumer credit, optimism, consumer sentiment

Weaknesses of USD -Risk on points

  • Government reopened. Democrats and Republicans need to reach an agreement within the 15th of February, otherwise the government will shutdown once again.

  • 76 members of WTO, including the United States, China, the European Union and Japan – agreed on Friday (Jan 25) to start negotiating a new framework on e-commerce,  at an informal ministerial gathering in Davos. Worth-noting the extend at which Chinese Davos participants were presenting their economy as a Developing one.

  • Trade tensions are on track to be resolved. Watch Liu He visit in Washington. Trade tensions are expected to be resolved within May 2019.

  • FED communicated 2 rate hikes during 2019 but markets are currently pricing no rate hike. On June‘s meeting there is a 22.6% probability of a first rate hike. (Compared with the previous week, 28.1% probability of a first 2019 hike happening on December). I am favoring the June rate hike scenario.

  • The US economy grows with no signs of inflation as capacity utilization is getting higher.
  • Improving macro readings: Manufacturing PMI, durable goods orders, industrial production, average earnings, Vehicles sales, home sales, capacity utilization rate


  • Consumer Confidence, core PCE, employment cost, personal income, average hourly earnings, unemployment, total vehicles sales. I want to confirm the argument that inflation is not peaking up.

  • Wednesday’s Monetary Meeting. I would expect that Powell zeroes down any possibility of a rate hike on March, arguing over the uncertainties produced by the latest government shutdown.


Long EURUSD 1.1372

Snapshot unchanged:

  • 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 -0.29%(-2bps w/w), 10y German Bond yields at 0.19% (-7bps w/w), 10y Italian Bond yield at 2.70% (-8bps w/w) 10y Greek Bonds yields at 4.08% (-10bps w/w)
  • Unemployment at 7.9%

Strengths of EURUSD:

  • A Deutsche Bank – Commerzbank merger is currently presented as unlikely. Nevertheless it makes sense to position one’s portfolio in favor of a mega merger scenario.
  • The EU-Japan trade deal, set to start on February 1st. New trade deals with Singapore, Australia, New Zealand and Indonesia are being negotiated.
  • Germany and France intend to create the next generation tanks and aircrafts.

  • The “Gillets Jaunes” could potentially become a new political party, participating in the European Elections in May.
  • Fiscal policy is expansionary in most of EU countries

  • improving macro readings: trade balance, unemployment, retail sales, German Trade balance, wage growth, industrial production, economic sentiment, private loans

Weaknesses of EURUSD:

  • No plans for battery cells manufacturing, or hydrogen cost production

  • ECB’s confidence is based on inflationary pressures from wages and the stronger balance sheet of European banks

  • 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, Services PMI,manufacturing PMI, current account, investor confidence,consumer confidence, German factory orders, German industrial production, M3


  • M3, Private Loans, GDP, unemployment, flash inflation readings

  • Next Monetary Meeting on 7 March.


No forecasts for GBP

We are only 9 weeks away from the deadline of Article 50 and the most probable scenario is the extension of the deadline, new elections and/or a new referendum.

A 12 months extension of the March deadline, far beyond the European Elections in May, is likely. In the meantime, Ireland hired 400 extra custom officers preparing for the currently default outcome, which is a no deal Brexit.

Snapshot improved:

  • Inflation at 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 1.33% (-2bps w/w)
  • Unemployment decreased to 4.0%


  • UK’s economy is experiencing inflationary pressure. BOE would have hiked rates more aggressively if there was no Brexit drama.

  • improving macro releases: GDP m/m, unemployment,Manufacturing PMI, Manufacturing production, average earnings, decreased inflation, lending to individuals, trade balance, construction output


  • 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: Service PMI, consumer’s confidence, retail sales, current account, industrial order expectations, home prices, Construction PMI, M4


  • M4, Consumer’s confidence, manufacturing PMI

  • Next Monetary Meeting on 7 February


Issued by Labis Michalopoulos, CFA




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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