#59 No rate hike, Tax on EU cars threat, Yield curve inverts

FED dots confirm no rate hike – Trump threatens to tax EU cars – Government bond yields drop and yield curve inverts

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.

No rate hike, Tax on EU cars threat, Yield curve inverts

How the forecasts did:

Last week it’s been the fist time there were no specified entry levels in the offered forecasts. With the exception of the long USDCAD call, the rest calls were paying off up until the Thursday’s Japanese session (long EURJPY, long AUDUSD, short USD, long EURUSD). On Friday the tide completely changed. The 10y German Government Bond yield dropped bellow 0.0% and all major economies’ 10y government bond yields ended the week with more than 10bps drop w/w.

The rate hike of Norway’s central bank, that was specifically noted in the last report, happened. In fact, Norges Bank is the only central bank that is communicating additional rate hikes in near future.

Given the inversion of the yield curve (3m US government bonds are now yielding more than the 10y bond) only risk-off trades are favored during the next week.

Major events of last week:

  • USA-EU: The new source of pain/uncertainty is already evident. Trump threatens to impose tariffs on EU car industry, if they fail to build plants in the USA.
  • USA-China : How the deal will be enforceable (i.e. what are the acceptable measures that the one party can take in case the other party fails to meet it’s obligations) is the subject of the ongoing negotiations. The end of April is a time milestone for a final deal that will most likely be met.
  • China-EU: Xi visited EU. Italy will sign the One Belt-One road initiative. Huawei’s 5G network is not included in the memorandum of understanding.
  • USA: Robert Mueller finished his report on Trump’s team potentially colluding with Russia in US elections and submitted it to the Attorney General William Barr. He will review it and report to the Congress.
  • UK: Brexit deadline extended for 3 weeks. Thousands (some are estimating 1 million people) rallied in London in favor of remaining in the EU
  • Cryptos: Total market cap at $140bn, +0,0% w/w, -83% from last year’s $821bn peak

Major events of next week:

  • Municipal Elections in Turkey and Presidential elections in Ukraine

  • A third Brexit vote on Friday


Short trades of EURJPY are favored, but no entry level makes sense.

Strengths of JPY:

  • In a risk-off environment, JPY is regarded as a safe haven and is favored
  • 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), trade balance, M2, current account, average cash earnings, household spending,capital spending, industries activity

Weaknesses of JPY:

  • a significant move has already happened. At current levels it does not make sense to short EURJPY
  • deteriorating macro readings: inflation decreased,unemployment, retail sales,Services PMI, manufacturing PMI bellow 50 but stable, industrial production, housing starts, monetary base, bank lending

Watch / New Releases:

  • industries activity, price of services, inflation, unemployment, retail sales, housing starts

  • Next Monetary Meeting on 25 April


Short AUDUSD at 0.7211


  • China’s new foreign investment law.
  • 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


  • 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, private sector credit, consumer’s sentiment

Watch / New Releases:

  • No market moving release is expected

  • Next monetary policy meeting on April 2.


Long USDCAD at 1.3304 and 1.3289

Strengths of CAD:

  • improving macro readings: employment change, inflation, current account, 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. The news cabinet shuffle happened on Monday.
  • 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 and the 2nd week in a row that US oil inventories declined. Yet, for oil prices to increase, 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. The oil price uptrend that began on Christmas is not convincing.
  • deteriorating macro readings: GDP, labor productivity, trade balance, capacity utilization, Manufacturing PMI, Ivey PMI, corporate profits,foreign securities purchases, building permits

Watch / New Releases:

  • trade balance, GDP

  • Next monetary meeting on April 24.


Long US index at 95.53


Strengths of USD – Risk off points:

  • inflation m/m increased.
  • deteriorating macro readings: GDP, current account, wholesale inventories and business inventories moving higher, Manufacturing PMI, services PMI, Non-manufacturing PMI, consumer credit, optimism, consumer credit, personal spending, vehicles sales, new home 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: unemployment, retail sales, unit labor cost, trade balance, manufacturing Index,industrial production, consumer confidence, construction spending, moving lower

Watch / New Releases:

  • housing market, consumer confidence, current account, trade balance, GDP, inflation

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


Short EURUSD trades are favored but no entry level can be specified


Strengths of EURUSD:

  • the possible merge of Deutsche Bank and Commerzbank
  • improving macro readings: trade balance, current account, retail sales, unemployment, trade balance, German GDP, German Trade balance, wage growth, industrial production, economic sentiment, private loans,German economic sentiment

Weaknesses of EURUSD:

  • Last Wednesday’s provincial elections in Netherlands and 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), M3, PPI, investor confidence,consumer confidence, German factory orders, German industrial production, German retail sales

Watch / New Releases:

  • M3, business climate

  • Next monetary meeting of the ECB on April 10


There are less reasons to go long GBP and more reasons to short it next week, but no forecast will be offered.

The extension of the Brexit deadline has materialized. On 12 April, in 3 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.

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, last week’s inflation reading increased at 1.9%, but is still bellow the 2.0% target.
  • improving macro releases: GDP, unemployment, Service PMI, manufacturing production, industrial production, average earnings and wages, lending to individuals, trade balance


  • deteriorating macro releases: retail sales, M4, home prices growth, consumer’s confidence, retail sales, current account, Business Investments, Construction PMI (below 50), construction output, Manufacturing PMI, industrial order expectations

Watch / New Releases:

  • High street lending, home prices, current account, GDP, lending to individuals, M4

  • the new Brexit vote on Friday

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


The blue line represents the aggregate demand curve of the economy (not the demand for the currency of the economy) and red line represents the aggregate supply curve.

The lines intersect at the latest published GDP growth and latest published inflation rate. The blue dots represent past snapshots of the economy (ie past GPD growth and past inflation). The green dot represents the estimated GDP growth and inflation. In the above example, the estimated economic equilibrium is the same with the current equilibrium.

The horizontal line is the targeted level of inflation so that long term growth is achieved. The vertical line represents long term potential growth. In the above example, the potential growth is within the range of 0.5% and1.0%. Targeted inflation is 2%. The economy is growing below its potential and with lower inflation.

The arrows represent the effects of the latest macro releases.


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.

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.

This week’s report has been sponsored by XM.com a trade mark of Trading Point Holdings Ltd, that owns Trading Point of Financial Instruments Ltd. Opinions expressed in the report do not represent the opinion of XM and do not constitute an offer or invitation to anyone to invest or trade.

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