Repatriation ?

The Dollar rally had a bit to do with the July Jobs report, but it was more about repatriation pledged from White House Economic Advisor Cohn. The July jobs report was sound across all headlines, and while wage growth came in just above expectation, it remains sombre.Despite the rally, the USD dollar is by no means out of the woods, but a return to US fiscal policy headlines or a more aggressive Fed balance sheet initiative will present some serious headwinds to the weaker US dollar narrative.

Just as the market had predictably begun to fade the post NFP headline inspired dollar rally, National Economic Council director Gary Cohn repatriation comment caught the market oversold dollars, and while the correction may be temporary, it does suggest traders are taking a more balanced view of US dollar risk given the latest US fiscal headline.

Repatriation flow is nothing to sneeze at, and despite the lowest hanging fruit on the Trump economic plan, U.S. corporations have been squirrelling profits and cash abroad to avoid paying the 35 % tax stamp at home for decades.Undoubtedly multiple billions will be held in foreign currency that will need to be converted to USD. While difficult to put an exact figure on this amount it’s thought to be somewhere between 250-500 billion in foreign currency. Regardless of the exact size those are some hefty numbers and will prove USD positive not only from a money inflow perspective but will also reduce the US current account deficit making US assets that more appealing to foreign investors.

However, we’ve been down this road before as traders adopt a case of once bitten twice shy at this morning open while desperately searching for reliable details on the Homeland Investment Acts tax repatriation

Much of this year’s dollar sell off has been on the back of Fed rate hike uncertainty and President Trump’s pro growth initiatives which have struggled to get government support. With the CME Group’s FedWatch tool barely budging on the NFP, the repatriation comments were by all accounts the primary catalyst for the short dollar unwind

The focus will shift to Fed speak as Dudley, Brainard, and Kaplan all hit the wires this week. With the market turning to Fed on hold for 2017, dealers will be looking for any change to a more aggressive balance sheet reduction narrative which could spark an extension of last weeks dollar rally

Given typical August liquidity conditions, we could be in for a bumpy week as the market irons our if we’re in a short term USD correction or a trend reversal.

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