Rate cut on July?
No regime change needed in Iran – Mexican border deal – RBA cuts rates – Dovish Draghi – Xi meets Putin
12 minutes read report, 8 pages
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How the forecasts did:
Last week, as the Ramadan was ending, the probability of a full out war in Iran was being investigated. That scenario was busted on Monday, when President Trump clearly stated that no regime change is needed. Geopolitical risk has decreased, deflationary pressure is starting to emerge with negative unit labor costs in USA and shrinking manufacturing across the world and the probability of the first rate cut by the FED at the 31 July meeting is rising.
If multilateral-ism is on stakes, and current levels are pricing in the probability of a new world order, betting on the multilateral-ism prevail seems prudent. This week, I intend to stop staying on the sideline and enter the short USD, long equities-oil–EUR–AUD-CAD scenario.
Exiting the long EURJPY trade at the breakeven level was premature, the long AUDUSD that paid off could have paid more if it was left for longer, the short USDCAD trade was not triggered for 2 pips and the long GBPUSD trade was not triggered for 1 pip. The last week’s forecast could have been filed as modest, if it had not been for the short EURUSD and long USD index trades that are deep in the red and losses should be taken.
Major events of last week:
- Geopolitics: (a) President Trump clarified that the US is not asking for a regime change in Iran. (b) USA is about to sell $2bn weapons to Taiwan, angering China. (c) Too much unchecked reporting is happening with North Korea.
- USA-Mexico: The USMCA deal that is replacing the NAFTA deal is on its way to be ratified. Canada has already ratified it. Latest Trump’s threats that he will impose tariffs on Mexican products starting from Monday the 10th of June, will not materialize, as Mexico was willing on Friday to step up its border guarding.
- USA-China: A decision on additional tariffs on $325bn worth of Chinese products will be made sometime after the upcoming G-20 meeting, scheduled for the 28th of June. This headline coincided with Governor Draghi’s press conference on Thursday.
- China-Russia: President Xi visited President Putin. The countries had $108bn bilateral trade in 2018, +25% y/y. Huawei is allowed to built a 5G network in Russia.
- Turkey: As Turkey is not taking concrete steps canceling the S-400 Russian military system purchase, the USA halts the training of Turkish pilots on F-35 fighter jets.
- Cryptos: The market cap declined for the first time in 7 weeks, and is now $257.2bn, -5.5% w/w, -68.7% from last year’s $821bn peak.
Major events of next week:
- Thursday’s OPEC monthly report. Oil supply chain has never been more constrained, but on the other hand, oil demand has never been so anemic.
Long EURJPY at 122.07 and 121.69
Strengths of JPY:
- improving macro readings: GDP (yet, it is expected to decrease in 2019), inflation, unemployment, trade balance, M2, monetary base, average cash earnings (decreasing with a lower rate), capital spending, insdustrial production, industries activity (but remains negative for 4th month in a row), manufacturing PMI (but stays below 50), economy watchers sentiment, consumer sentiment, bank lending
Weaknesses of JPY:
- Domestic demand was expected to pick up due to increased government spending and the current monetary policy. Yet, recent data suggest the opposite. On top, economy needs to overcome the upcoming consumption tax hike, scheduled to be imposed on October.
- downward revision of expected GDP from OPEC.
- deteriorating macro readings: retail sales, household spending, current account, , Services PMI, machine tool orders, consumer confidence, PPI(prices sold to corporations), housing starts
Watch / New Releases:
bank lending, current account, GDP, M2, machinery orders, PPI, Manufacturing Index, tertiary industry activity
next Monetary Meeting of the Bank of Japan on 20 June.
Long AUDUSD at 0.6924
- RBA cut rates to boost the labor market and household consumption. Markets approved the monetary accommodating decision and AUD strengthened. The RBA is confident on a 2H19 rebound.
- Upcoming positive macro readings from China.
- Newly elected government.
- improving macro readings: GDP, current account, M1, service PMI, Manufacturing PMI, AIG manufacturing index, AIG services index, construction work done (but is still in a negative territory), household consumption, consumer’s sentiment, wage price index
- the manufacturing PMI of China dropped bellow the 50 threshold again.
- Housing market and Prices not rising, credit not increasing
- deteriorating macro readings: inflation gauge, unemployment, job advertisements, inflation expectations, retail sales, trade balance, home loans, private sector credit, home sales, building approvals, AIG construction index, company operating profits, decreasing capital expenditure, private capital expediture, business confidence
Watch / New Releases:
business confidence, consumer sentiment, inflation expectations, unemployment
Next monetary meeting of the RBA on July 2.
No forecast for USDCAD
Strengths of CAD:
- tariffs for the Canadian steel and aluminum imported to the USA have been lifted. Canada has ratified the USMCA deal that succeed NAFTA.
- housing market is expected to pick up in 2H19, following the stabilization in Toronto and Vancouver. BOC continues to be optimistic about a 2H19 rebound.
- improving macro readings: GDP, unemployment, labor productivity, inflation at the BOC’s target, Ivey PMI, retail sales, wholesale sales, manufacturing sales, employment change, trade balance, housing starts, building permits, corporate profits
Weakness of CAD:
- USDCAD is now testing the significant 200Day moving average level. More good news are needed for this level to be crossed south.
- despite the rising tensions in the Persian Gulf and the Iranian production that is out of the market, oil prices were falling and only managed to rebound during the last week, the same week that US Crude inventories rised. New insights will become available on the OPEC’s report, expected on Thursday.
- fiscal policy expected to have a -0.2% net effect in GDP growth.
- weak government until the upcoming elections on October. This could be traslated to no rate hike until the elections.
- deteriorating macro readings: current acount, wholesale sales, capacity utilization, Manufacturing PMI (below 50), input prices of raw materials RMPI, foreign securities purchases, manufacturing sales
Watch / New Releases:
housing market and Thursday’s OPEC’s monthly report.
Next Monetary meeting of the Bank of Canada on July 10.
Short USindex trades at 97.11$
Strengths of USD – Risk off points:
- GDP q/q growth at 3.2%, way higher than the expected 2.1~2.8% range, resilient job market. OPEC made an upward revision for GDP growth and expects 2.6% and inflation metrics are picking up.
- Improving macro readings: inflation expectations, trade balance, core PCE, personal spending, unemployment, consumer confidence, optimism, manufacturing Index, housing starts, building permits, Non-manufacturing PMI, vehicles sales, consumer credit
Weaknesses of USD –Risk on points:
- the first rate cut of this business cycle can happen as early as at the 31 July’s October meeting, as unit labor cost m/m is negative and Non Farm Payrolls were way bellow 100K.
- the yield curve is continues moving downwards.
- Geopolitical risk is falling.
- Deteriorating macro readings: GDP, inflation, unit labor cost, current account, PPI,capacity utilization rate, retail sales, factory orders, durable goods orders, industrial production, business inventories, wholesale inventories rising, manufacturing PMI, services PMI, consumer sentiment, construction spending, existing home sales, new home sales, home prices
Watch / New Releases:
PPI, core CPI and CPI, retail sales, capacity utilization, industrial production, consumer sentiment, business inventories, inflation expectations
- Next Monetary Meeting of the FED on 19 June.
Long EURUSD at 1.1171
Strengths of EURUSD:
- ECB communicated that the prolongation of uncertainty (outcome of US-China trade relations, and outcome of Brexit) made them postpone any potential rate change for another 7 months (rates will remain the same at least through 1H2020). There is no sign of inflation expectations de-anchoring, or a probability of deflation or recession. On the other hand, Draghi admitted that there have been talks on the reintroduction of QE or a rate drop.
- tariffs on autos have been postponed. Nevertheless, the trade relations between the USA and the EU are the next hot issue for 2H19.
- improving macro readings: GDP, unemployment, M3, private loans, German GDP, German Trade balance, German factory orders, wage growth, service PMI, consumer confidence, industrial production, business climate, investor confidence
Weaknesses of EURUSD:
- EU triggers the Excessive Deficit Procedure program for Italy, following a 6 months’ long negotiation period during which, Italy was arguing that they would run a 2.05% deficit. Instead they are currently running 2.5% deficit.
- negative yields are back to stay.
- deteriorating macro readings: inflation, retail sales, current account, trade balance, PPI, German industrial production, German Manufacturing PMI (way below 50 and falling), German retail sales, German consumer climate, European industrial production, EU Manufacturing PMI (stable but below 50), economic sentiment, German economic sentiment
Watch / New Releases:
investor confidence, industrial production
Next monetary meeting of the ECB on July 25.
Short GBPUSD at 1.2831 and 1.2900
- The candidate of the Brexit Party of the unblushing Niger Farage, failed to win the by-elections at Pererborough. Labor party candidate won with a narrow margin of 683 votes.
- 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”. Inflation is peaking up.
- Unemployment fell and is expected to further fall to 3.5% by 2022.
- improving macro releases: GDP, inflation, rising input prices for retailers, M4, unemployment, industrial production, Service PMI, wages, trade balance, increasing public sector net borrowing, high street lending, mortgage approvals, lending to individuals
- As Prime Minister May is stepping out, the Tories need to be quick to find new leadership. Boris Johnson is no longer prosecuted for his misleading claims during the Brexit referendum campaign. His defense line was “It was just a political claim open to, and available for, contradiction and debate”. i.e. he was bullshit-ing and the courts should not prosecute hims because the public was free to discount his word. It is filed under the arguments to short GBP, as this unblushing clown is the front-runner in the Tories leadership contest.
- property values predicted to fall by 1,25% within 2019, according to the BOE
- deteriorating macro releases: retail sales, consumer inflation expectations, average earnings, consumer’s confidence, current account, Business Investments, Manufacturing PMI (crossed below 50), construction PMI (crossed below 50), construction output, manufacturing production, industrial order expectations, home prices
Watch / New Releases:
GDP, manufacturing production, construction output, unemployment
Next Monetary Meeting of the Bank of England on 20 June.
Issued by Labis Michalopoulos, CFA
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For qualified perspective clients of the advisory service:
GIPS standards are all about full, fair, consistent and comparable presentation of actual returns of the past. No models, no back-testing, no promises. I am doing that. I am publishing in real time, via a 3rd party, my actual returns since inception where one can see the most strict, comparable, revealing metric of the industry: the monthly Sharpe ratio.
My current monthly Sharpe ratio stands at 0.27 as can be found at www.forexfactory.com/dxmix
My current annual Sharpe ratio is 0.27 multiplied by √12 = 0.27 x 3.46=0.93 Annual Sharpe Ratio
The numbers used to stand at 0.5 monthly Sharpe ratio and 1.73 annual Sharpe ratio up until the August of 2019 for 45 consecutive months. On 24 August 2018, 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 as impressive as they used to be. My 54 months, since inception, monthly Sharpe Ratio (that includes the leveraged AUDUSD trade) stands at 0.27, equal to 0.93 Annual Sharpe Ratio.
I cannot claim that I will be performing with the return of my best months, but I can tell that I will hover around my average returns. Claiming with a 95% confidence, that my next month* return will be within my average monthly return ± 2 standard deviations is a well educated statement I can make anytime.
My average monthly* return ± 2 standard deviations is from -16.54% up to 20.49%
My average monthly* return ± 2 stadard deviations becomes -5.74% up to 9.47% , excluding the 4 months effect of the one time mistake trade.
* the monthly returns are the actual returns within a month. They are not presented on annualized basis.