Tax Reform doubts weigh on the Dollar

Tax Reform doubts weigh on the Dollar

Tax Reform

Tax reform doubts are weighing on the greenback all but reversing out last weeks gains. Concerns appear to be based in the Senate due to the paper thin majority the Republicans hold(52-48) as reports surface that Marc Short, Trump’s legislative affairs director, “is increasingly worried that one Senator could derail the Administration’s tax plan. Rand Paul, who helped to kill health reform, could be “a no on everything” ( politico). If the grandstanders in the parties right-wing follow Rand Paul lead, Tax Reform will most certainly struggle to pass.

Once again the Tump administration is caught in a Catch 22 of their own devices. By wooing the anti-establishment vote at the hight of the populist fervour, they’ve created political monsters from those senators who rode the tea-party wave into power that now stand prepared to veto any reform unless it meets and ultra-right agenda.
And when you factor in Trump’s escalating feud with Senator Bob Corker, the math is starting to look a bit a tad shaky.

Fed Uncertainty 
Fed uncertainty continues to weigh on both the currency and bond markets as the ten-year US  bond yields are unable to breach the 2.40 mark. Despite last weeks  USD dollar rally on the back of some stellar ISM economic data, there was far from a consensus buy-in on the move as Fed Chair uncertainties continued to dominate traders psyche.After all,  it took little more than a baseless North Korea headline to send the dollar reeling.

While the market continues to look to Fridays CPI for some guidance, there’s increasing chatter that the street will ignore the print being more concerned with the next Fed Chair.

For what its worth, oddsmakers are shading Powell as the most likely candidate versus Warsh, roughly 40%-30%. Some in the Powell camp feel further vindicated by his latest headline: Powell has cancelled a Friday speech entitled “Are Rules Made to be Broken? Discretion and Monetary Policy.”. The suggestion is that by removing this controversial headlined statement, setting the stage for an open vetting process.


The big event of the day was Catalan President Puigdemont parliament speech where he called for deferred independence. A friendly way of extending talks with the Spanish government and hopefully agree how to prevent a future separation. The EUR popped 30 pips on the speech but gained little traction as this is little more than kicking the can down the road. It’s unlikely we’ve heard the last of this debate despite cooler heads prevailing.

Chinese Yuan 

Eyes will be on the CNY fix this morning as the Pboc guides the Yuan to an appreciating path of stability ahead of a critical national leadership meeting next week. Also, there were some significant positions unwound which are suspected to be exporter driven  Again exporters suffer the consequences of hoarding dollar, and there’s  no  question that in my view the Pboc is hell-bent on creating two-way currency flows the RMB complex

EM Asia FX

Not too surprisingly Asia EM FX is looking a lot brighter today.
Tax reform issues are lead weights  around the greenback neck, US treasury yields are broadly lower, and Catalan risk has efficiently been rolled over to a future date, so investor appeal for both riskier assets and currencies has tentatively materialised.

The Korean Won has been on a tear as investors play catch up in equity markets after a week-long holiday.

Finally, there has been minimal fallout from this week’s Turkish tumult, while tensions remain high there was minimal regional contagion.

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