Dollar Rally Depends on Trump

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Market Drivers April 26, 2017
Trump tax spurs dollar rally
AUD CPI misses
Nikkei 1.10% Dax -0.01%
Oil $49/bbl
Gold $1267/oz.

Europe and Asia:
AUD CPI 0.4% vs. 0.5%

North America:
CAD Retail Sales 8:30

The dollar popped in Asian session trade today on the back of leaks about the Trump administration’s new tax proposal due out later today, but the rally faded by European morning as risk aversion flows kicked in.

President Trump’s tax proposal is expected to ask for a reduction of the corporate rate to 15% from the current 35%. The tax plan includes what’s called “pass-through” entities such as LLCs used by millions of small businesses in US. If enacted, it could a massive boon to spending as it will have the practical effect of a large tax cut for the highest earners in the US population. The tax plan, however, makes no provisions for offsetting revenue generating measures and there is considerable doubt that it could become law in its present form.

Nevertheless, the market viewed that proposal as well as separate proposal to put a modest 10% repatriation tax on the 2 Trillion dollars of offshore US corporate profits as dollar bullish and pushed USDJPY through the 111.50 level by midday Asian session dealing. By morning Europe, however, investor enthusiasm had cooled and USDJPY dropped towards 111.00 figure pushed there by heavy sales of EURJPY.

Ever since the Macron win in the French election, the markets have been riding a wave of risk on flows with EURJPY up 600 pips in just two days. The risk rally will now be contingent on today’s events in Washington DC. If the Trump administration can convince the markets that it has a reasonable chance to pass tax reform this year, equities will get another boost higher and will likely carry FX with them. For now, USDJPY is likely to find support at the 111.00 level, but if traders don’t like what they hear out of Washington DC, the unwind could be swift and vicious with USDJPY quickly dropping towards the 110.00 figure.

The pair has clearly made a near-term bottom at the 109.00 level, but the rebound will depend almost exclusively on investor sentiment towards political developments in DC. With US economy in a stall, only a concerted effort on tax reform and a big infrastructure spend will convince the market that the risk rally should continue.

Boris Schlossberg
Managing Director

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