10 minutes read report, 9 pages
How the forecasts did:
The short EURUSD, short GBPUSD, long US index calls were correct. Yet, it’s been a week with no gains and no losses as none of the forecasted entry levels were triggered.
The 10y- 3m yield spread of the US government bonds once again turned possitive. The yield curve is still inverted (as 2Y, 3Y, 5Y and 7Y maturities yield lower than shorter term maturities) and the 4Q18 GDP was revised downwards to 2.2% from 2.6, but the latest (January) release of global trade volume that pointed to an increase of +2.4% and the 1Q19 GDP estimates that are revised upwards, give enough reasons to change mode and start favoring risk-on trades for the next week.
Major events of last week:
- Risk Off-Risk on. On the one hand the 4 page summary of the Mueller investigation reported zero coordination of Trump or any of his associates with Russia regarding the 2016 presidential elections. Two attempts to influence the elections were made by Russia (hacking of email accounts of the Clinton campaign, disinformation on social media), but without the help of Trump. Additionally, the Attorney General concluded that the presented evidence of the Mueller investigation are not sufficient to justify obstruction of justice offense from Trump. On top the Pentagon approved $1bn for the funding of the Trump’s wall. On the other hand temperature is risisg in Israel and Yemen. The USA recognised Israeli sovevereignty over the Golan Heighs ahead of this weekend’s Arab summit.
- USA-China: Nothing worth reporting as negotiations, that currenly are framed within written pacts in 6 areas, can last for weeks or months, contrary to last week’s feeling that the end of April is a time milestone for a final deal.
- EU-China: Multilateralism and the need to reform the WTO was supported in a meeting between Xi, Macron, Merkel and Junker in Paris $40bn deals were signed between France and China including huge purchase orders to Airbus. An EU-China summit is set to happen on April 9.
- Equities: Lyft made an IPO at $24bn valuation, the 5th largest offering since 2018. Facebook updates it’s procedure ahead of EU elections. Advertisers need to provide verifiable contact details before running ads. Boeing provides a software fix and updates the required pilot training. Huawei reports +25% profits in 2018.
- Venezuela: Situation is stalled. Guido is banned for running for office within the next 15 years by the Maduro administration.
- UK: May’s deal was rejected for a 3rd time on Friday. This time, the margin of defeat was 58 votes, far less than the 149 votes two weeks ago.
- Cryptos: Total market cap at $143bn, +2,41% w/w, -82.5% from last year’s $821bn peak
Major events of next week:
- Monetary meeting of the Australian Central Bank (RBA) on Tuesday
Long EURJPY at 123.69 and 123.45
Strengths of JPY:
- GDP q/q growth rebounded from the negative territory. Domestically economy is doing fine. The only source of concern are the exports due to the moderate global growth.
- Monetary policy is unchanged.
- improving macro readings: GDP (yet, it is expected to decrease in 2019), unemployment, trade balance, M2, current account, average cash earnings, household spending, capital spending, industries activity (but it is stil negative for 3rd month in a row), housing starts
Weaknesses of JPY:
- deteriorating macro readings: inflation decreased, retail sales,Services PMI, manufacturing PMI bellow 50 but stable, industrial production, monetary base, bank lending
Watch / New Releases:
- manufacturing PMI, monetary base, household spending
- Next Monetary Meeting on 25 April
Long AUDUSD at 0.7077, 0.7065 and 0.7030
- China’s revised foreign investment law and a new announcement that they would lower their interest rates to help the economy.
- Australian federal elections are scheduled to occur on May.
- improving macro readings: retail sales, current account, trade balance, inflation, inflation expectations, unemployment, M1, service PMI (but it is still bellow 50), private capital expenditure, AIG manufacturing index, household consumption, wage price index, business confidence, building approvals, private sector credit
- GDP latest reading was unexpectedly lower. China reported very low imports (-5.7%m/m) and exports (-20%). Industrial production growth decreased and unemployment increased at 5.3%
- Westpac, one of the top four Australian banks, is expecting two rate cuts, in August and November 2019. Moreover it lowered it’s GDP expectations to 2.4%y/y from 2.7%. On Wednesday, the 3 year government bond yield fell bellow RBA’s main rate of 1.50%, an additional sign that a rate cut could happen within the next 3 to 8 months.
- deteriorating macro readings: GDP, inflation gauge, job advertisements, manufacturing PMI, home sales, home loans,company operating profits, decreasing capital expenditure, construction work done, consumer’s sentiment
Watch / New Releases:
- New home sales, building approvals, retails sales, trade balance
- Tuesday’s monetary policy meeting. Focus on the remarks on household consumption and demand for credit
Long USDCAD at 1.3281 and 1.3265
Strengths of CAD:
- Latest OPEC’s report had no downward revision of demand growth. In addition it was the first time in 6 months that US cut it’s total oil production. Oil price may enjoy a short term rally as US oil production faces logistics/quality issues and South Korean refiners rejected the fist US oil cargos.
- improving macro readings: GDP, employment change, inflation, current account, trade balance, manufacturing sales, wholesale sales, retail sales
Weakness of CAD:
- Prime Minister lost political capital due to his involvement in helping the big contractor, SNC-Lavalin, to avoid criminal prosecution related to contracts in Libya. Elections are scheduled to occur in October.
- For Brend to cross the 69.70$ threshold, an additional 1Million Barrels per day (MBpd) reduced OPEC supply will be needed, and this can only happen if China and India are denied access to Iranian oil. Current reduction exceptions permitted by the USA do not seem to end any time soon.
- deteriorating macro readings: labor productivity, capacity utilization, Manufacturing PMI, Ivey PMI, corporate profits,foreign securities purchases, building permits
Watch / New Releases:
- manufacturing PMI, unemployment
- Next monetary meeting on April 24.
Short US index at 97.05
Strengths of USD – Risk off points:
- Geopolitical risk in Israel and Yemen is rising
- deteriorating macro readings: GDP, core PCE, current account, wholesale inventories and business inventories moving higher, Manufacturing PMI, services PMI, Non-manufacturing PMI, consumer credit, optimism, consumer confidence, consumer credit, personal spending, vehicles sales, capacity utilization rate
Weaknesses of USD -Risk on points:
- FED dots confirmed that there will be no rate hike in 2019
- Geopolitical risk in Turkey, Taiwan, Pakistan India seem to be falling.
- Improving macro readings: trade balance, unemployment, retail sales, unit labor cost, trade balance, manufacturing Index,industrial production, construction spending, moving lower, housing market, new home sales, consumer sentiment
Watch / New Releases:
- retail sales, manufacturing PMI, business inventories, construction spending, durable goods orders, total vehicles sales, service PMI, uemployment rate
- Next Monetary Meeting of the FED on May 1st.
No forecast for EURUSD
Strengths of EURUSD:
- the technically significant level of 1.1176 could stop the downtrend
- the possible merge of Deutsche Bank and Commerzbank
- improving macro readings: trade balance, current account, retail sales, unemployment, M3, German GDP, German Trade balance, wage growth, industrial production, economic sentiment, private loans,German economic sentiment, business climate
Weaknesses of EURUSD:
- next week’s macro releases are expected to disappoint
- the upcoming Spanish & Finish general elections on April. EU elections on May.
- EU-USA trade relations will be the next point of focus. The Trump administration wants to include agriculture in the negotiations and threatens to impose tariffs on EU car industry unless Europeans built plans in the USA. The EU is willing to limit negotiations to industrial goods, as it was agreed in the July’s Junker-Trump summit. Additionally, the EU wants the steel and aluminum tariffs to be removed.
- downward revisions of expected GDP growth from European commission (1.3% EU growth from 1.9% expected in November) and from the ECB (1.1% revised from 1.7%)
- deteriorating macro readings: Service PMI, Manufacturing PMI (bellow 50 and falling more than expected), German Maufacturing PMI (bellow 50) (the Friday’s risk off mode was triggered by these disappointing releases), PPI, investor confidence,consumer confidence, German factory orders, German industrial production, German retail sales
Watch / New Releases:
- Manufacturing PMI, inflation (CPI and core CPI), retail sales, service PMI,
- Next monetary meeting of the ECB on April 10
No forecasts for GBP, as the Brexit soap opera is getting tiresome to be watched.
On 12 April, in 2 weeks, UK needs to decide if they will participate in EU elections. Until that time, the possibility of May’s resignation and new UK elections is valid. All options are on the table.
Here you may see a petition to revoke Article 50 and remain in the EU.
If the UK decides not to participate in the EU elections on May, then the Brexit drama must come to an end by the 22nd of May.
- BOE is the only central bank that continues to communicate that inflationary pressures exist and that an ongoing tightening of monetary policy at gradual and limited extend is appropriate. Indeed, latest inflation reading increased
- improving macro releases: GDP, unemployment, M4, Service PMI, manufacturing production, industrial production, average earnings and wages, trade balance, home prices
- deteriorating macro releases: retail sales, consumer’s confidence, retail sales, current account, Business Investments, Construction PMI (below 50), construction output, Manufacturing PMI, industrial order expectations, high street lending,lending to individuals
Watch / New Releases:
- manufacturing PMI, construction PMI, services PMI
- the new Brexit votes
- Next Monetary Meeting of the Bank of England on 2 May
Issued by Labis Michalopoulos, CFA
Redistribution is allowed as long as the author and his contact details are referenced.
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.
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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.
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Any research in this document has been independently 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.
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