Dollar Soft on Tax Reform Uncertainty

new time money

  • Uncertainty about US tax reform is weighing on the dollar
  • Further complicating matters are the election results from last night
  • President Trump arrives in China just as it reports October trade data
  • During the North American afternoon, the RBNZ will announce its policy decision
  • Bank of Thailand kept rates steady at 1.5%, as expected; Poland is also expected to stand pat

The dollar is broadly weaker against the majors on US tax reform uncertainty.  The Antipodeans are outperforming, while sterling and Nokkie are underperforming.  EM currencies are mostly firmer.  BRL and MXN are outperforming, while KRW and RUB are underperforming.  MSCI Asia Pacific was up 0.2%, with the Nikkei falling 0.1%.  MSCI EM is down 0.1%, with the Shanghai Composite rising 0.1%.  Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open.  The 10-year US yield is down 1 bp at 2.31%.  Commodity prices are mixed, with WTI oil down 0.3%, copper down 0.2%, and gold up 0.4%.

Uncertainty about US tax reform is weighing on the dollar.  The Washington Post reports that the Senate version might delay the corporate tax cut until 2019.  Other major changes include eliminating the so-called SALT deduction, marking a very different version than the House version.  We have always warned that nothing is written in stone, but the stark differences shaping up in the two versions suggests a very difficult period of negotiating ahead.

Further complicating matters are the election results from last night.  The closely watched race for Governor of Virginia went easily to Democrat Northam.  Indeed, Democrats pretty much swept this important swing state.  His opponent Gillespie had tied himself (belatedly) to President Trump, and the loss will likely lead some Republican candidates up for re-election in 2018 to be more concerned about the impact of their votes on tax reform.

Either way, US rates remain under downward pressure and this has in turn weighed on the dollar.  The greenback is down today against most major currencies, with the exception of sterling.  The ranges are narrow, however, suggesting more of a consolidative day rather than a reversal of the dollar bull trend.

President Trump arrives in China just as it reports October trade data.  Exports rose 7% y/y and imports by 17% y/y, leading to a monthly surplus of $38.2 bln that puts the annual total on track to meet last year’s surplus.  Yet China is well aware that it may come under scrutiny.  Press reports that Commerce Minister Zhong Shan released a list of measures being undertaken to boost imports, including holding the first ever trade fair dedicated to imports.

Yesterday, US Treasury Undersecretary for International Affairs Malpass passed up the opportunity to complain about China’s FX policies.  He said that the US believes that the level of currencies now around the world are in good shape.  Of course, it wouldn’t make sense for Malpass to criticize China as a currency manipulator just as his boss arrives in Beijing.

During the North American afternoon, the RBNZ will announce its policy decision.  Like the RBA, it is widely expected to keep rates steady.  There are no Fed speakers scheduled for today, nor are there any major data releases.

Bank of Thailand kept rates steady at 1.5%, as expected.  CPI rose only 0.9% y/y in October, still below the 1-4% target range.  The bank sees inflation returning to this target range around mid-2018, which shows a dovish bias.  We see steady rates well into 2018.

National Bank of Poland is expected to keep rates steady at 1.5%.  CPI rose 2.1% y/y in October, which is still in the bottom half of the 1.5-3.5% target range.  Still, with the economy so robust, we do not think the central bank can keep rates steady through 2018, as it plans to.