Home Daily Commentaries USD hit on tax reform fears

USD hit on tax reform fears

Daily Currency Update

The Canadian Dollar has had a very good November so far. It hasn’t been a one-way trade because of the volatility of incoming economic data but from an opening level of USD1.2904 on November 1st, the pair has moved down to a low of 1.2667. Taking the “Commonwealth currencies” together, the CAD is also stronger against the Aussie Dollar (down from a high of 0.9908 to 0.9712) and a little less so against the Kiwi Dollar (from a high of 0.8924 to 0.8790 this morning). Against the more volatile British Pound, GBP/CAD was as high as 1.7150 at the beginning of the month but has tumbled almost 5 cents in these first 10 days of November and after dipping to 1.6634 in London, opens this morning in North America at 1.6662. Oil prices are little changed overnight with Brent crude at $63.78 per barrel and NYMEX futures at $57.06. The day ahead is quiet in terms of scheduled economic data in Canada (new home prices are expected up 0.2% m/m and 3.8% y/y) If the Canadian Dollar can hold on to current levels, it will end both the week and the month-to-date as the best performer among all the major currencies.

Key Movers

The USD had a very poor day on Thursday with its index against a basket of major currencies tumbling below the 94.40-94.85 range which had contained it all week. We highlighted yesterday that the 20-day average of 94.10 would become the downside target and the low turned out to be 94.16. In London this morning it has traded down to 94.13 but has subsequently rebounded very modestly to open in North America today at 94.25. The big problem for the USD hasn’t been President Trump’s Asia visit or what he did or didn’t say with Premier Xi in Beijing. Instead, it’s all about the lack of progress on tax reform in the United States, upon which so many hopes for equities and the US Dollar had been pinned. In a piece of legislative text guaranteed to make the heart sink, the House Ways and Means Committee released the updated GOP tax bill. The very first sentence reads, “An Amendment to the Amendment in the Nature of a Substitute to HR 1 Offered by Mr. Brady of Texas” and - believe your author – it doesn’t get any better from there. The S&P 500 index at one stage Thursday was showing its biggest loss in almost 3 months but rallied to close just 9 points lower having at one point lost 25. Futures trading today indicates another 10 point loss at the NY open. We’ve warned all week here about tax reform prospects and the USD. For the moment, it is outweighing anything the President has said or done on Asia trip.

With the US Dollar under pressure and few attractive alternatives elsewhere, the euro was the best performing currency on Thursday; holding on to a big figure of EUR/USD1.16 throughout the day. This came after the European Commission released updated economic forecasts for the Eurozone economy. Back in Spring, it forecast euro area GDP growth of 1.7% in 2017 and 1.8% in 2018. These numbers have now been revised up to 2.2% and 2.1% with next year now seeing the economy growing at its fastest pace in a decade. The EU Commission described it as “a new phase of the economic recovery, with stronger growth driven by resilient consumption, the global upswing, loose financing conditions and falling unemployment”. This morning in Europe, the EUR has moved up to a high of USD1.1660. Against the buoyant Canadian Dollar, the EUR reached a best level of 1.4775 in London trading today but has subsequently dropped back around 20 pips to open in North America at 1.4757. We’d expect EUR/USD to stay on a USD1.16 big figure throughout the day but gains to be capped around 1.1670 unless the US stock market takes another dive lower on tax reform disappointment.

The British Pound has this morning been pulled between the opposing forces of politics and economic data. It is widely reported the Irish Government has put forward a draft paper “Dialogue on Ireland/Northern Ireland”, seeking hard guarantees about the border question before the European Union leaders’ summit next month. Basically, the document argues that the UK should stay in the Customs Union to avoid a hard border between Northern Ireland and the Republic. Viewed from London, where the Government is propped up by a formal coalition with the Ulster Unionists, this is not possible as it would mean granting special status to Northern Ireland and undermine the integrity of the UK. Quick progress on Brexit talks looks ever more elusive and the worst case “no deal” scenario looks just a bit more likely this morning than it did yesterday. Having touched early lows of GBP/USD1.3120 and GBP/CAD1.6635, the pound was then lifted by better than expected numbers on industrial production and trade. The output data showed UK manufacturing rose 0.7% m/m in September; the 5th consecutive increase. The monthly goods trade deficit narrowed to -£11.3bn as exports rose 4.5% and imports rose just 0.4%. Taking the Q3 as a whole, however, trade is still likely to knock around 0.6% off UK GDP. GBP/USD opens in North America this morning at 1.3146. Against the Canadian Dollar, it is down almost 1½ cents from yesterday’s high of 1.6815 to open at 1.6662.

Today’s RBA’s Quarterly Statement of Monetary Policy puts some flesh on the bones of the monthly interest rate decision. Running to 76 pages, the November edition has an awful lot of flesh and there’s plenty to keep even the most geeky analyst fully occupied for quite some time. The Overview section notes, “The Australian economy is expected to expand at a solid pace over the next couple of years, and labour market developments have been quite positive of late. The drag on growth from the end of the mining investment boom has eased and is likely to end sometime in the next year or so. Investment in the non-mining sector has been increasing but growth in consumption has been below average. Inflation and wage growth remain low. Both are expected to increase only gradually over time.” The RBA’s detailed forecasts for the economy were largely unchanged from the last SoMP. GDP growth is expected to average around 3.25% for 2018 and 2019 whilst unemployment at the end of the forecast horizon is seen around a quarter of a point lower than last time at 5.25%. Unlike the RBNZ, the RBA uses market interest rates for its forecasts and doesn’t give explicit signals. Nonetheless, the Aussie Dollar initially liked what it saw on the economy. AUD/USD reached a high in London of 0.7694 with AUD/CAD up at 0.9746. It has subsequently given back all these gains to open in North America at USD0.7662 and CAD0.9710.

Earlier this week, NZ Finance Minister Grant Robertson launched a review of the Central Bank’s mandate to include maximizing employment as a monetary policy goal. However, he said there was no plan to include the New Zealand dollar, the world’s 11th most traded currency, in the bank’s revised mandate. Speaking in Wellington overnight, Mr. Robertson said that the Reserve Bank of New Zealand’s 2% inflation target could be up for discussion although the government remains committed to the current 1-3% inflation band. The new Labour government has said it might include an employment target in the RBNZ’s monetary mandate, even if it is less specific than the government’s own, first-term 4% target. Mr. Robertson has already said that a dual mandate, targeting both inflation and employment, “may mean looser policy in some instances.” These latest comments have been enough to trigger a bit of profit-taking on the Kiwi Dollar which has now fallen from a high of USD0.6972 after the RBNZ meeting to open in North America this morning at 0.6938. Against the Canadian Dollar, the NZD fell to an overnight low of CAD0.8776 but has recovered a little to open at NZD/CAD0.8790.

Expected Ranges

  • USD/CAD: 1.2620 - 1.2730 ▼
  • EUR/USD: 1.1600 - 1.1670 ▲
  • GBP/USD: 1.3090 - 1.3200 ▼
  • AUD/USD: 0.7630 - 0.7700 ▼
  • NZD/USD: 0.6900 - 0.6990 ▼