Turning the page on part one of Tax Reform

Turning the page on part one of Tax Reform
While global FX markets were quiet overnight, at least one page has finally been turned in the wearisome tax reform chronicle after House Speaker Paul Ryan was able to muster enough GOP votes to pass the houses colossal 5.5 trillion tax reform bill. The bill passed 227-205, with 13 Republicans breaking rank to vote against the legislation. Not surprising there was not a single yes vote from the Democrat side of the house, drawing attention to the stinging partisan split as the tax fight moves to a  barely-divided Senate.

The lack of action across FX assets was hardly a surprise given that all the risk now rests in the Senate Showdown. Many differences on critical points need to be ironed out, so it’s far too early to signal an end of this lengthy melodrama.

Tax reform remains the primary market risk, but significant chapter and verse are still ways off as the vote is not likely to take place until after US Thanksgiving. And only then will both levels of government open discussions to reconcile particulars.

Yield Curve 

US yield curves remain the primary market focus as a flattening bias continues to offer more questions than answers. A plethora of commentaries, especially the doom and gloom variety, would have you believe a bear flattening cycle is an indication of a looming recession. But in fact, and more specific to today’s markets is that a flattening period is a reasonable expectation as the market prices in a bit more Fed normalisation based on the latest run of tier one US economic data

Crude Prices

Crude prices continued to fall overnight, as the usual supply and demand factors weigh on sentiment. Downcast demand outlooks coupled with fears of rising U.S. output continue to spark a robust sell-off in the oil complex.Tonight’s Baker Hughes oil rig count will give another update on the near-term US supply picture. However, there has been little knock-on effect in petrol currencies as the big dollar narrative around tax reform continues to dominate sentiment

The US Dollar 

There doesn’t appear to be much directional bias in FX market or even a conviction amongst my colleagues, and trust me that is an odd one. Chalk up this week’s perplexing moves to the annual “year-end” anomaly where traders fall prey to position squeezes. Given the market’s lack of enthusiasm heading into weeks end, I suspect profit-taking and position trimming will dominate landscape today again.

The Japanese Yen

The USDJPY has recovered somewhat but remains stuffed between two competing narratives. ( Tax Reform and Risk vs US Yields) But after the latest washout left dollar bulls licking their wounds and with Thanksgiving around the corner, I suspect speculative activity to drop and position unwinds to continue. Only a convincing break of 2.40 % UST 10-year yields will spark a rally as traders adopt a wait and see approach to USDJPY.

The Euro
The constant demand for EUR has temporarily abated after filling the post-ECB gap and then some.Frankly, the fundamentals have not changed that dramatically but short EUR positions spooked on the stronger EU data profile which could cause an about-face in ECB dovish expectations. Despite the viciousness of the move higher this week, the risk-reward looks topside.

The Australian Dollar

Positive employment data without offering up a decent bump in wages keeps us in the bear camp, But with little to get excited about today, I suspect locals will look to pack it in early and redirecting focus to next week’s speech by RBA Governor Lowe and RBA Minutes

Underpinning the Aud to a degree, Chinas commodity market receives a bit of reprieve as Mainland authorities funnelled another 310 billion yuan into the banking system attempting to find that tricky balancing act between debt deleverages, financial stability and calm commodity markets.

The Malaysian Ringgit

Focus will be on Q3 GDP due out at 12:00 Noon Local
An extensive range of forecast( 5.1 to 6.2 %) but the consensus is for a slight moderation from Q2 due to the latest export data which had Sept exports come in at 14.8 percent Vs 18 % expected. We’re looking for a print of 5.6 % after the surprising 5.8%Q2 GDP. Indeed this is still a very robust number and would continue to support the case for a January rate hike and bullish MYR.

On the domestic front, consumer spending may have cooled due to high household debt levels and higher energy prices.

Another stellar print above 5.7 % should see the MYR strengthen further whereas a reading below 5.5 % my encourage profit-taking as the market is moderately short USDMYR.

The Korean Won

Yesterday the Kospi was up on the back substantial foreign demand Also Canada and Korea signing a standing bilateral currency swap agreements which allow both countries to provide liquidy to one another was viewed quite positively by the markets
Price action is a bit chippy yesterday as  USDKRW longs were getting stopped out after finally breaking the 1110 level but with similar action on the USDTWD, it makes for a very compelling regional move.

Overnight there was a general trend to book profits given that the broader US dollar sell-off has abated on the back of positive news from the House on Tax Reform. However look for more potential KRW upside if equity flow continues to gain traction

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes