#62 The new normal

European Japanification – US GDP to return to 2% – China increasing Consumption

10 minutes read report, 9 pages

To help speed reading blue is used for new arguments, forecasts are underlined and found at the beginning of each page, hyperlinks are marked.

How the forecasts did:

Last week’s forecasts were on the correct side of the market. Unfortunately though, with the exception of the long AUDUSD trade that paid off, no other advised entry level had been triggered. Short USDindex was missed by 0.07$, long EURUSD was missed by 9pips, long USDCAD was missed by 2pips, long EURJPY was missed by a lot.

A pause of the risk-on sentiment is favored during the upcomming week. The bigger picture is that (i) the10y US govermtent Bonds yields (2.56%) nothing more that the current FED’s rate (ii) the ECB seems determined to follow the “low for longer” Japanese example (iii) next major factor to drive market action could be the USA-EU trade relations (iv) China’s economy is changing gear with rising consumption (v) and inflation in emerging markets is bellow 3% for the first time ever.

Major events of last week:

  • Globe: IMF revised it’s growth expectations for 2019. Germany, Italy, UK and globe’s numbers are alarming. Recovery is expected from Turkey and Argentina. Downward revisions of GDP from OPEC.
  • USA-China: Although they have not yet finalized a deal between them, the two countries agreed to establish enforcement offices at each other’s land to monitor whichever agreement they come up with. As far as the content of the agreement is concerned, China would need to allow full foreign ownership of business entities by 2025 (at the past there was a need for Chinese majority ownership, now in some industries like finance, foreign majority ownership is allowed, the goal is to allow full foreign ownership)
  • EU-China: The new summit of China led coalition of Central and Eastern European nations took place in Croatia. Greece (the 10y bond yield dropped to 3.32%) is set to join the 16+1 coalition (11 countries of the coalition are EU members) and wants to pursue the Athens-Budapest railway.
  • EU-USA: The trade relations between the two are deteriorating over the way EU treats Airbus, seen as unfair subsidising. $11bn tariffs have been threatened on jetliners, cheese, wine and motorcycles.
  • Equities: UBER filled for IPO at $100bn valuation. My view is to wait and invest in Airbnb’s upcoming IPO to get exposure to the sharing economy or wait for the market to offer UBER’s shares at a 50%~55% discount from the opening price.
  • Israel: Prime Minister Benjamin Netanyahu will most likely manage to form a coalition government, within the next 42 days, with other right-wing factions that supported his previous goverment, and will stay in power for the 5th term.
  • Nothing worth reporting for Turkey, Ukraine, Venezeula. Germany to join the UN forces in Yemen
  • Cryptos: Total market cap remained at $173bn, -1% w/w, -78.9% from last year’s $821bn peak

Major events of next week:

  • 1Q19 earnings: Goldman Sachs on Monday, Bank of America, Blackrock, Netflix, Johnson & Johnson on Tuesday, Alcoa, Morgan Stanley on Wednesday. Numbers above -4% earnings growth would be considered possitive news.

  • Wednesday’s OPEC meeting

  • Watch any update on USA-EU relations, USA-China relations


Short EURJPY at the opening and 127.67


Strengths of JPY:

  • the risk-on mode could pause during the announcement of 1Q19 earnings that are expected to be negative, favoring 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, manufacturing PMI (but bellow 50), average cash earnings, capital spending, industries activity (but it is stil negative for 3rd month in a row), housing starts, consumer confidence, consumer sentiment, bank lending

Weaknesses of JPY:

  • deteriorating macro readings: inflation decreased, retail sales,Services PMI, industrial production, monetary base, household spending

Watch / New Releases:

  • Industry activity, trade balance, inflation

  • Next Monetary Meeting on 25 April


Long AUDUSD at 0.7120



  • China’s latest macro releases confirm that the expansionary fiscal policy produces possitive results. Increased chinese new loans, M2 and trade balance help australian exports.
  • Australian new budget, a few weeks before May’s elections, is the first surplus budget of the decade and includes 75bn AUD for ifrastructure, tax cuts for low and medium income famillies & energy assistance payments
  • improving macro readings: retail sales, current account, trade balance, inflation, inflation gauge, home loans, unemployment, M1, service PMI (but it is still bellow 50), private capital expenditure, AIG manufacturing index, household consumption, consumer’s sentiment, wage price index, building approvals, private sector credit


  • GDP latest reading was unexpectedly lower and next release of unemployment rate is expected to be negative.

  • 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%. Recently, 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. Yet the communication of RBA, on 2nd of April, remained dovish.

  • deteriorating macro readings: GDP, job advertisements, inflation expectations,manufacturing PMI, home sales,company operating profits, decreasing capital expenditure, business confidence

Watch / New Releases:

  • Unemployment rate

  • Next monetary meeting on May 7.


No forecast for USDCAD as there are many moving parts to consider and attention should be given to OPEC’s decisions, on Wednesday.


Strengths of CAD:

  • improving macro readings: GDP, inflation, current account, trade balance, manufacturing sales, wholesale sales, retail sales, housing starts

Weakness of CAD:

  • weak government due to their involvement with the big contractor, SNC-Lavalin, related to contracts in Libya. Elections are scheduled to occur in October.
  • for the Brend rally to continue (Friday’s close was 71.18$), an additional 0.5Million 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. On top, latest OPEC’s monthly report included a downward revision in demand growth.
  • The latest releases of US crude oil inventories that have increased for 3 weeks in a row are favoring oil price dropping and CAD weakening
  • deteriorating macro readings: employment change, labor productivity, capacity utilization, Manufacturing PMI, Ivey PMI, corporate profits,foreign securities purchases, building permits

Watch / New Releases:

  • Wednesday’s OPEC meeting

  • manufacturing sales, retail sales, inflation, foreign securities purchases

  • Next monetary meeting on April 24.


Short US index at 96.70 and 96.85


Strengths of USD – Risk off points:

  • Geopolitical risk in Iran and Libya is rising. The USA designated Iran’s Revolutionary Guard as “foreign terrorist organization.
  • deteriorating macro readings: GDP, core PCE, inflation expectations, retail sales, factory orders, current account, wholesale inventories moving higher, Manufacturing PMI, Non-manufacturing PMI, consumer credit, optimism, construction spending, consumer sentiment, consumer confidence, personal spending, capacity utilization rate

Weaknesses of USD -Risk on points:

  • Latest release of the US initial jobless claims as well as the non-farm employment change give enough reasons to postpone any upcoming recession scenarios, for at least 7 more months.
  • FED dots confirmed that there will be no rate hike in 2019
  • Improving macro readings: inflation, trade balance, unemployment unchanged at historic low, unit labor cost, trade balance, services PMI, durable goods orders, manufacturing Index,industrial production moving lower, housing market, new home sales, vehicles sales,

Watch / New Releases:

  • Capacity utilization rate, trade balance, retail sales, manufacturing PMI, services PMI, building permits and housing starts

  • Next Monetary Meeting of the FED on May 1st.


Long EURUSD at 1.1253

Strengths of EURUSD:

  • as we are approaching to the upcoming EU elections it seems that the shift of power in the EU parliament would not be significant
  • the possible merge of Deutsche Bank and Commerzbank
  • the yields of the government bonds of the periphery are decreasing
  • improving macro readings: trade balance, current account, unemployment, M3, German GDP, German Trade balance, service PMI, wage growth, industrial production, economic sentiment, private loans,German economic sentiment, business climate,investor confidence

Weaknesses of EURUSD:

  • the upcoming Spanish later on April & Finish general elections tomorrow the 14th of April.
  • 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, ECB, OPEC and IMF

  • deteriorating macro readings: inflation, retail sales,Manufacturing PMI (bellow 50), German Maufacturing PMI (bellow 50), PPI, consumer confidence, German factory orders, German industrial production, German retail sales, European industrial production

Watch / New Releases:

  • economic sentiment, current account, trade balance, inflation, manufacturing and service PMI

  • Next monetary meeting of the ECB on 6 June.


Short GBP at 1.3248 and 1.3279

The flexible extension of Brexit until the 31st of October is a reality, so the focus should now turn to the performance of UK’s economy, which is poor.

Here you may see a petition to revoke Article 50 and remain in the EU.



  • 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, industrial production, construction PMI (below 50), Manufacturing PMI, average earnings and wages, trade balance


  • downward revision of GDP growth in 2019 from the IMF. (from 1.50% on January, to 1.20% now. Note that the projection assumes that there will be an orderly Brexit withn 2019.
  • deteriorating macro releases: retail sales, consumer’s confidence, retail sales, current account, Business Investments, Service PMI (below 50), construction output, manufacturing production, industrial order expectations, high street lending,lending to individuals, home prices

Watch / New Releases:

  • average earnings, unemployment rate, inflation, retail sales

  • Next Monetary Meeting of the Bank of England on 2 May


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.

This material is for Qualified Investors and Professional Clients only and should not be relied upon by any other person.

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.

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 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.

Reliance upon information in this material is at the sole discretion of the reader.

Leave a Reply

Your email address will not be published. Required fields are marked *