#65 Zero Inflationary pressure

FED continues being patient, BOE revises upwards UK’s GDP

500 years from Leonardo Da Vinci death on 2 May 1519

12 minutes read report, 8 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:

Following the 22~16 April’s forecasts that failed miserably, it was about time to celebrate. All of the forecasts that were triggered are paying off (long USDCAD, keeping the short US index position open until 97.18$ and go long at 97.00$ ). The long EURJPY, short AUDUSD forecasts were not triggered. No forecast has been made for EURUSD and GBPUSD.

The BOC (Bank of Canada) expects global trade to pick up in 2H19 and the BOE (Bank of England) is pointing that global growth had shown signs of stabilization and is better than expected.

Major events of last week:

  • China-Russia: The two nations participated in joint naval drills at the northern Chinese port of the city of Qingdao
  • USA-China: Nothing new in this front. New round of talks are scheduled for Wednesday. Well thought arguments against negotiating on USDCNY can be found here. The current milestone of the sighing of a deal continues being the end of May-early June, before the G20 summit in Osaka.
  • China: The One Belt-One Road summit resulted in the signing of $64bn worth of new projects.
  • Rising Geopolitical risk: N.Korea is having new weapon tests and the US navy passed from Taiwan
  • Venezuela: Things get tough as Maduro continues enjoying the support of the Venezuelan military forces.
  • France: The international worker’s day celebrations in Paris, turned violent
  • Cryptos: Total market cap at $185.6bn, +8.54% w/w, -77.3% from last year’s $821bn peak

Major events of next week:

  • The Japanese market reopens on Tuesday following the 1 week long holidays for the new Emperor.
  • 1Q19 earnings Calendar: Bluerock Residential Growth REIT on Tuesday, Navios Maritime on Wednesday
  • Monetary policy meeting of the RBA (Australia) on Tuesday and the Norges Bank (Norway) on Thursday.


Strengths of JPY:

  • Domestic demand is expected to pick up due to increased government spending and the current monetary policy. Yet, economy needs to overcome the upcoming consumption tax hike, scheduled to be imposed on October.
  • improving macro readings: GDP (yet, it is expected to decrease in 2019), inflation, retail sales, trade balance, M2, current account, manufacturing PMI (but bellow 50), average cash earnings, capital spending, industries activity (but remains negative for 4th month in a row), housing starts, consumer confidence, consumer sentiment, bank lending


Weaknesses of JPY:

  • The source of concern are the exports due to the moderate global growth. Indeed, the trade balance fell.
  • deteriorating macro readings: unemployment, trade balance, Services PMI, industrial production, monetary base, household spending

Watch / New Releases:

  • Manufacturing PMI, monetary base, consumer confidence, household spending

  • next Monetary Meeting of the Bank of Japan on 20 June.



  • the expected rate cut could potentially have the buy the rumor sell the fact effect.
  • Australian new budget, a few weeks before May’s elections, is the first surplus budget of the decade and includes 75bn AUD for infrastructure, tax cuts for low and medium income families & energy assistance payments
  • improving macro readings: retail sales, current account, trade balance, inflation, inflation gauge, home loans, unemployment, M1, service PMI (crossed above 50), private sector credit, private capital expenditure, AIG manufacturing index, household consumption, consumer’s sentiment, wage price index


  • Latest Manufacturing and Non-manufacturing PMI releases from China are still above the 50 threshold but they are decreasing.
  • GDP latest reading was unexpectedly lower, unemployment increased and inflation fell.
  • 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, inflation (fell significantly, way more than expected) unemployment, job advertisements, inflation expectations,manufacturing PMI, home sales, building approvals,company operating profits, decreasing capital expenditure, business confidence

Watch / New Releases:

  • inflation gauge, AIG construction index, retails sales, trade balance

  • Tuesday’s monetary meeting of the RBA. A rate cut is expected.


Strengths of CAD:

  • housing market is expected to pick up in 2H19, following the stabilization in Toronto and Vancouver.
  • Waivers have been waived and starting from the 2nd of May anyone violating the US sanctions is facing the risk of being excluded from the US financial markets. 2.7million barrels that Iran was producing daily, are set to be lost from the global markets. Saudi Arabia and UAE are supposed to step up production, while Brent oil is conveniently trading above the 200Day Moving average.
  • improving macro readings: inflation near the BOC’s target, retail sales, employment change, current account, trade balance, wholesale sales, housing starts


Weakness of CAD:

  • downward revision of expected GDP growth from the BOC and negative m/m GDP.
  • fiscal policy expected to have a -0.2% net effect in GDP growth.
  • Increasing US oil inventories for a second week in a row.
  • weak government until the upcoming elections on October.
  • deteriorating macro readings: GDP (negative m/m number), wholesale sales, labor productivity, capacity utilization, Manufacturing PMI (bellow 50), Ivey PMI, corporate profits,foreign securities purchases, building permits, manufacturing sales

Watch / New Releases:

  • Ivey PMI, housing starts, trade balance, unemployment, building permits

  • Next Monetary meeting of the Bank of Canada on 29 May.


The FED kept both the wording and the monetary policy unchanged. The US economy is on target, the job market is strong, inflation is weaker but Powell is communicating his confidence that lower inflation will not persist.

The economic indicators that are especially being watched are (i) the indications of inflation pressure, (ii)inflation expectations and (iii) labor market.

The FED’s balance sheet reduction is planned to end on September 2019. An ongoing debate that is scheduled to be resolved within 2019 is on the maturities held in its balance sheet. Currently the FED is holding longer term bonds, relatively to the bonds held before 2008.

Strengths of USD – Risk off points:

  • GDP q/q growth at 3.2%, way higher than the expected 2.1~2.8% range.
  • Geopolitical risk is rising again in North Korea,Taiwan, Iran and Venezuela.
  • Latest release of the US initial jobless claims as well as the non-farm employment change postpone any upcoming recession scenarios, for at least 7 more months.
  • Improving macro readings: GDP, inflation,inflation expectations, personal spending, trade balance, unemployment, retail sales, wholesale inventories moving lower, consumer confidence, consumer sentiment, unit labor cost, trade balance, durable goods orders, manufacturing Index, manufacturing PMI, services PMI, industrial production moving lower, new home sales, vehicles sales

Weaknesses of USD –Risk on points:

  • Economy is experiencing zero inflationary pressure with home prices increasing at a slower pace and unit labor costs decreasing. Note that the q/q unit labor cost release was the catalyst of the February’s 2018 equity sell-off. This contradicts with the increased inflation expectations.
  • Deteriorating macro readings: unit labor cost, core PCE, factory orders, current account, Non-manufacturing PMI, consumer credit, optimism, construction spending, existing home sales

Watch / New Releases:

  • Economic Optimism, consumer credit, PPI, trade balance, inflation

  • Next Monetary Meeting of the FED on 19 June.


The pair strengthened following the Spanish elections and was pushed further by better than expected GDP, inflation and unemployment readings.

Strengths of EURUSD:

  • The shift of power in the EU elections on 26 May is not expected to be significant, contrary to the frightening press articles.
  • improving macro readings: GDP, inflation, trade balance, unemployment, M3, German GDP, German Trade balance, Manufacturing PMI (bellow 50),German Manufacturing PMI (way bellow 50) wage growth, industrial production, economic sentiment, German economic sentiment, business climate,investor confidence

Weaknesses of EURUSD:

  • EU-USA trade relations will be the next point of focus.

  • The yield differential between the EU and the USA remains historically elevated. German GDP growth expected at 0.5% in 2019. Downward revisions of expected European GDP growth from the commission, ECB, OPEC and IMF
  • deteriorating macro readings: inflation, retail sales, current account, private loans, service PMI, PPI, consumer confidence, German factory orders, German industrial production, German retail sales, European industrial production

Watch / New Releases:

  • Services PMI, investor confidence, retail sales, German Factory orders, German trade balance

  • Next monetary meeting of the ECB on 6 June.


Local elections have been carried out in 248 English and 11 Irish councils. The Tories and the Labor party recorded diminishing votes. The Green Party and the Liberal Democrats, presenting themselves as “the true remain party”, strengthened.

The BOE kept its monetary policy unchanged as expected. Mark Carney’s comment that “interest rate increases could be more frequent than expected if the economy performs as the BOE is expecting” failed to push GBP higher.


  • Upward revision of GDP growth from the BOE (1.2% February’s expectation, 1.5% May’s expectation) coupled with Carney’s comment that “it will require more, and more frequent interest rate increases, than the market currently expects. His comment is valid, provided that there is a bounce in investments and hiring
  • Unemployment is expected to further fall to 3.5% by 2022.
  • improving macro releases: GDP, retail sales, unemployment, industrial production, construction PMI, Service PMI, average earnings and wages, trade balance, increasing public sector net borrowing, high street lending, lending to individuals, home prices


  • polls for the EU elections are presenting the unblushing Nigel Farage in the first place
  • property values predicted to fall by 1,25% within 2019, according to the BOE
  • deteriorating macro releases: consumer’s confidence, retail sales, current account, M4, Business Investments, Manufacturing PMI, construction output, manufacturing production, industrial order expectations

Watch / New Releases:

  • Monday is a holliday

  • retail sales, GDP, manufacturing production, construction output

  • Next Monetary Meeting of the Bank of England on 20 June.


Issued by Labis Michalopoulos, CFA




I am thanking Petros Kalligas,CFA. The cooperation has been enjoyable for both of us. It was very valuable for me to have a reader of my report, willing to correct syntax errors and typos before publishing the report and sending it to you. Without having the structure, nor the funding of a news organization, I had enjoyed the privilege to have an editor, editing my writings.

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.

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