Tax Reform $ Bounce

Tax Reform Bounce

Foreign Exchange Traders were getting very edgy in Asia yesterday amid holiday-thinned markets with little impetus one way or the other, but thankfully there was some news to sink their teeth into overnight.

The dollar was firmer against most currencies in NY helped along by robust U.S. housing data, and a steeper US Treasury curve with 10-year yields rising to 2.47%.

But after all was said and done,  doubts about the overall economic impact from the US tax bill capped the dollar gains as the dollar sold off versus the yen and held losses against the euro after the House approved the bill.

Currency traders continue to think the economic bump will be small while there’s increasing chatter that the markets have likely overemphasised the impact of tax repatriation flows in the overall dollar narrative.

Equity Markets

Equity investors came up for air as stock markets were flat to indifferently lower through most of the session. No doubt a bit of year-end profit taking is setting in while typical dip buyers were absent likely wary of taking new positions ahead of the holiday break. But without question, the vibe around tax reform remains overwhelmingly positive for equity markets

Energy Markets 

The American Petroleum Institute reported a 5.22 million barrel decline in US crude inventories at the end of the day. WTI was lifted to $57.75 from $57.58. The significant draw was a huge turn around for last weeks report,  but more significantly it comes amidst reports of increased US Shale Production this week.

The Euro

EURUSD tested 1.1850 level spurred on by reports that Germany will flood the markets with Ultra Long Debt next year

But the EU hawks took flight overnight also with Bundesbank President Jens Weidmann, who told reporters that “a faster conclusion of net asset purchases and a communicated end date (to asset purchases) would have been reasonable”. And Governing Council member Jozef Makuch told his audience that “discussions are increasingly moving from asset purchases to the eventual future use of interest rates to regulate the economy”.

With Draghi continuing to lean dovish it’s clear the ECB internal squabbles will come more to the fore in 2018 and should lend support to the hawkish ECB narrative and the EURO.

This shifting narrative explains the disconnect between the USDJPY and EURUSD moves overnight.

IN the background remains the debate if the ECB was as dovish as the market assumed. Eurozone money markets are steepening and given the outstanding economic prints coming out of the EU; it’s easy to rationalise that the EU economy is leaps and bounds ahead of where the US economy was sitting when the Fed began to normalise.Structurally the Euro should move higher.

The Japanese Yen

USDJPY rallied from the open, rising from 112.55 to 113.06 before late afternoon profit-taking took prices back to 112.89. Rising US Treasury yields underpinned the currency pair. The price action played out as planned with dollar bears fading the tax bill uptick but perhaps less aggressively as scheduled after 10 Year UST’s move closer to the fundamental 2.5 % level. But overall, the Fed’s  easy money policy and with little economic growth from tax reform expected the dollar Bears remain camped in the 113.25-50 region looking to fade any rallies

The market will now pivot to the BoJ meeting tomorrow. The USD will be the primary driver in USDJPY momentum, even with bearish dollar bets on the rise it’s hard to rationalise a home run trade in the pair. Japans economy continues to struggle with inflation and despite all the noise around YCC of late, its unlikely the BoJ will change tack anytime soon meaning the weaker JPY storyline remains intact.

The Australian Dollar

Price action says it all. The RBA meeting passed without any fireworks. There was nothing to suggest a shift from neutral bias until at least mid-2018 despite their perceived marked improvement in the overall economy.

The market may be overplaying the diminishing differential narrative as broader USD dollar weakness alone is positive for the Aussie given the high beta. But the optimistic side of global growth narrative, resilient commodity prices and robust regional economies could provide the draft for the A dollar
The Malaysian Ringgit

The MYR was driven overnight by the broader USD momentum on the back of fast short-term money. Given that the dollar is trading with some positive energy from both Tax Reform and higher US Yields, investors will be reluctant buy the MYR until all the dust settles. But the Ringgit remains very comfortable at current ranges and the stability alone is a real positive in my view.

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
Stephen Innes

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