Doubts About Tax Reform Weigh On The Dollar
Tax reform doubts are weighing on the greenback, all but reversing out last week’s gains. Concerns appear to be based in the Senate due to the paper thin majority the Republicans hold (52-48) as reports surface that Marc Short, Trump’s legislative affairs director, “is increasingly worried that one Senator could derail the Administration’s tax plan.” Rand Paul, who helped to kill health reform, could be “a no on everything” (Politico). If the grandstanders in the party’s right-wing follow Rand Paul’s lead, Tax Reform will most certainly struggle to pass.
Once again the Trump administration is caught in a Catch-22 of their own devising. By wooing the anti-establishment vote at the right of the populist fervor, they’ve created political monsters from those senators who rode the tea-party wave into power and now stand prepared to veto any reform unless it meets and ultra-right agenda. And when you factor in Trump’s escalating feud with Senator Bob Corker, the math is starting to look a tad shaky.
Fed uncertainty continues to weigh on both the currency and bond markets as the 10-year US bond yields are unable to breach the 2.40 mark. Despite last week’s dollar rally on the back of some stellar ISM economic data, there was far from a consensus buy-in on the move as Fed Chair uncertainties continued to dominate traders’ psyches. After all, it took little more than a baseless North Korea headline to send the dollar reeling.
While the market continues to look to Fridays CPI for some guidance, there’s increasing chatter that the street will ignore the print, being more concerned with the next Fed Chair.
For what it’s worth, oddsmakers are shading Powell as the most likely candidate versus Warsh, roughly 40%-30%. Some in the Powell camp feel further vindicated by his latest headline: Powell has cancelled a Friday speech entitled “Are Rules Made to be Broken? Discretion and Monetary Policy.” The suggestion is that by removing this controversial headlined statement, he’s setting the stage for an open vetting process.
The big event of the day yesterday was Catalan President Puigdemont’s parliament speech where he called for deferred independence. A friendly way of extending talks with the Spanish government and hopefully agreeing on how to prevent a future separation. The EUR popped 30 pips on the speech but gained little traction as this is little more than kicking the can down the road. It’s unlikely we’ve heard the last of this debate despite cooler heads prevailing.
Eyes will be on the CNY fix this morning as the PBoC guides the yuan to an appreciating path of stability ahead of a critical national leadership meeting next week. Also, there were some significant positions unwound which are suspected to be exporter-driven. Once again, exporters suffer the consequences of hoarding the dollar, and there’s no question that in my view the PBoC is hell-bent on creating two-way currency flows in the RMB complex.
EM Asia FX
Not too surprisingly, Asia EM FX is looking a lot brighter today. Tax reform issues are lead weights around the greenback’s neck, US Treasury yields are broadly lower, and Catalan risk has efficiently been rolled over to a future date, so investor appeal for both riskier assets and currencies has tentatively materialized. The Korean won has been on a tear as investors play catch up in equity markets after a week-long holiday.
Finally, there has been minimal fallout from this week’s Turkish tumult, while tensions remain high there was minimal regional contagion.