Budget! Tax Reform! Dollar Flies on Hope

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Market Drivers October 20, 2017
Dollar higher across the board on Senate budget passage
Catalan conflict persists
Nikkei 0.40% Dax 0.36%
Oil $52/bbl
Gold $1280/oz.

Europe and Asia:
EUR EZ CA 33B vs. 31.5B
GBP UK PSNB

North America:
CAD CPI 8:30
CAD Retail Sales 8:30
USD Existing Homes 14:00

The dollar soared in Asian session trade today, gaining ground against all of its trading partners on investor optimism that US Congress is on the way towards passing tax reform legislation.

In overnight session the Senate approved the budget resolution by strict party vote, avoiding the specter of a filibuster by Democrats. The bill now moves to reconciliation with the House, but the structure of the deal suggests that President Trump and the GOP may be able to pass through his tax bill on strict majority basis as he tries to enact one of the key cornerstones of his legislative agenda.

The news sparked a wave of optimism across all capital markets with US 10 year yields running all the way to 2.38% before coming in for some profit taking. Investor enthusiasm may be premature as actual tax reform could turn out to be an agonizingly frustrating process. However, today’s actions clearly move the idea forward and positive sentiment towards the dollar should persist for the rest of the day.

USDJPY stalled just ahead of the 113.50 level as the pair made fresh 3 month highs, and any breakout today is likely to push the pair towards a test of the 114.00 barrier as markets bet on continued US growth and further rate hikes.

Elsewhere, the tension between Spain and Catalonia has not dissipated, but markets continue to essentially ignore the conflict. EURUSD fell in concert with all the majors but held the 1.1800 level in morning European dealing.

With little economic data on the docket, the focus will remain on Washington DC and the fixed income markets. If the 10-year yields hold their gains USDJPY could approach 114.00 as the day proceeds.

Boris Schlossberg
Managing Director

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