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Tax Reforms and the USD in Focus, With One Eye on the EUR

Bob Mason
Earlier in the Day: The main event of the Asian session today was the RBNZ’s monetary policy decision. There had been some uncertainty going into the release of the minutes and statement on whether there would be a surprise rate cut. At the last meeting, the RBNZ had turned quite dovish and since the last meeting, … Continue reading Tax Reforms and the USD in Focus, With One Eye on the EUR

Earlier in the Day:

The main event of the Asian session today was the RBNZ’s monetary policy decision. There had been some uncertainty going into the release of the minutes and statement on whether there would be a surprise rate cut. At the last meeting, the RBNZ had turned quite dovish and since the last meeting, a number of stats had disappointed, including softer inflation expectation figures for the 2-year horizon. The saving grace was perhaps the uptick in inflation through the 3rd quarter and the softer Kiwi off the back of the recent General Election.

We saw the Kiwi Dollar move from $0.69236 to $0.69503 upon release of the minutes and statement, the pickup in the Kiwi Dollar stemming from the RBNZ’s announcement to bring forward its forecasted rate hike by one quarter to the second quarter of 2019. The more hawkish RBNZ wasn’t enough to keep the Kiwi in positive territory however, the Kiwi Dollar down 0.10% at $0.6959 at the time of writing.

On the data front, key stats through the session included Japan’s September current account figures, with the current account surplus narrowing from ¥2.38tn to ¥1.84tn in September. The stats did little for the Yen, which had been on the back foot through the earlier part of the Asian session, rising from an intraday low ¥114.07 to ¥113.57 against the Dollar at of writing.

Risk appetite took a turn for the worse, with Asian equities pulling back from record highs, leading to the bounce in the Yen. There were no stats to cause the sell-off, leaving Trump’s continued threats to North Korea to be the only reasonable cause for the markets to run for cover.

Following Wednesday’s threats, the U.S president said this morning that there is power to free the world from the North Korean menace. Adding to the negative sentiment are concerns over the tax bill. News had hit the wires on Tuesday that Republicans in the House of Representatives had a different view on reforms than their peers in the House. Today’s anticipated release of the detailed text is expected to disappoint, with the real meat of the bill likely to have been left out after 3-days of ironing out the details.

Other stats included Australia’s September home loans, which tumbled 2.3%. Concerns over rising debt have weighed on the RBA throughout the year. Efforts to tighten credit standards may be taking effect should the downward trend in home loans persist.

Despite the negative numbers, the Aussie Dollar held its ground, rising from $0.76639 to $0.76669 upon release of the numbers, with yield differentials favouring the Aussie Dollar earlier in the day. At the time of writing the Aussie Dollar was up 0.05% at $0.7682 in what has been a U-turn of a morning, recovering from an intraday low $0.7663 ahead of this morning’s data.

The Day Ahead:

Following a relatively quiet first half of the week on the data front, the economic calendar is a little busier through the European session. The key stat out of the Eurozone this morning will be Germany’s September trade figures, with the trade surplus forecasted to narrow. Trade figures have been relatively robust, but with the EUR having crossed into $1.20 levels in early September, the effects of EUR strength may be evident in this morning’s numbers.

The ECB’s economic bulletin is also scheduled for release and the Bank’s economic outlook will be a factor for the markets to consider. We can expect the EUR to brush off any negative numbers out of Germany should there be any upward revisions to economic forecasts.

At the time of writing, the EUR was up 0.09% at $1.1605, with the risk off sentiment ahead of the European open providing support. Any material moves may be on hold however, with all eyes on the economic bulletin ahead of the Republican’s tax reform bill later today.

For the Pound, we have yet to see the effects of this morning’s RICS House Price Balance numbers for October. Only a net 1% of surveyors reported rising prices, down from September’s 6%. London prices saw the worst result since the wake of the global financial crisis, with 63% of surveyors reporting a drop in house prices. Uncertainty over Brexit and the ability of the Tory party to navigate Britain out of the EU has weighed on the housing sector and, with the latest rate cut by the BoE, a further slowdown in the sector may be on the horizon.

With Theresa May losing a 2nd cabinet minister in a matter of days and lack of progress on Brexit, we can expect the Pound to continue to face choppy times. The 0.14% gain at the time of writing will be more as a result of the softer Dollar and concerns over the U.S tax reform bill and Trump’s rhetoric over North Korea than any shift in sentiment towards the Pound. $1.32 levels look a way off for now and likely to be in the hands of the U.S administration later today.

On the data front, this afternoon’s NIESR GDP estimate will garner some interest, though politics will continue to be the key driver for now.

Across the Pond, stats are limited to the weekly jobless claims figures. While we will expect the Dollar to respond, focus will be on the release of the tax reform bill due out today. With the Dollar Spot Index down 0.08% at 94.794, there could be quite a move later today. The markets for now are showing little optimism ahead of the release.

This article was originally posted on FX Empire

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