Markets Shrug Trump’s Tax 1-Page Tax Plan, CAD Rebounds on NAFTA News, Yen Steady after BoJ

The financial markets had very little reaction to the highly anticipated announcement of tax reforms by US President Donald Trump. DJIA reversed earlier gains and closed slightly lower by -0.1% at 20975.09. S&P 500 also closed down -0.05% at 2387.56. Both were held below record intraday highs of 21169.11 and 2400.98 respectively. 10 year yield also closed lower, losing -0.016, at 2.311. The dollar index struggled to find follow through buying above 99 and is back at 98.90 in Asian session. In the currency markets, Euro remains the strongest major currency for the week, followed by Sterling and Swiss Franc. Yen remains the weakest one after BoJ stands pat, raised growth forecast but lowered inflation projections. Canadian dollar is still trading down for the week but is given a mild boost on news that US will stay with NAFTA for the moment.

Trump delivered a 1-page tax plan

Trump gave a one-page handout to reporters at the White House outlining the tax proposals. The plan includes sections on business and individual reforms. Top corporate tax rate of all businesses will be lowered from 35% to 15%. There will be a "one-time" tax on dollars held by corporations overseas but the rate is not decided yet. Tax breaks for special interests will eliminated. For the individuals, seven tax brackets will be reduced to three of 10%, 25% and 35%. Standard deduction will be doubled and there will tax relief for families with child and dependent care expenses.

Canadian Dollar rebound as NAFTA stays

Canadian Dollar rebounds after the White House said that Trump will not terminate the participation in the North American Free Trade Agreement immediately. The White House said in a statement that there were "pleasant and productive" conversations with leaders of Mexico and Canada. And Trump agreed not to terminate NAFTA at this time and the leaders agreed to "proceed swiftly, according to their required internal procedures, to enable the renegotiation of the Nafta deal to the benefit of all three countries." Commerce Secretary Wilbur Ross said earlier this week that the administration is working with the Congress to start renegotiation of NAFTA as Trump has been openly criticizing the deal. But some Republicans are clearly in objection to scrapping NAFTA.

BoJ raised growth forecast, cut inflation estimate

BoJ left monetary policies unchanged today as widely expected. In the quarterly report of Outlook for Economic Activity and Prices, the central bank lowered inflation forecast for the current fiscal year to 1.4%, down from January’s projection of 1.5%. Inflation forecast for fiscal 2018 was held unchanged at 1.7%. On the other hand, growth forecast for fiscal 2017 was revised up to 1.6%, from 1.5%. For fiscal 2018, growth is projected to be at 1.3%, up from prior estimation of 1.1%.

UK PM May held constructive talk with EC President Juncker

UK Prime Minister Theresa May met with European Commission President Jean-Claude Juncker yesterday on a discussion over Brexit. UK’s main negotiator David Davis and EU’s negotiator Michel Barnier were also present. May’s spokesperson said in a statement that the meeting was "constructive" and May "reiterated the UK’s commitment to achieving a deep and special partnership with the European Union." EC also said in a statement that the meeting was "constructive" and addressed "issues of strategic interest". No detail about the conversation was released. EU leaders will meet this Saturday to work on their own negotiation plan and official talk will start after UK election on June 8. Barnier noted that the negotiations must be concluded within 18 months to allow time for approval by respective parliaments.

CBI director general warned no trade deal should be Plan Z

CBI director general Carolyn Fairbairn warned that the long term trading relationship between UK and EU is "the real prize", "dwarfing any potential divorce settlement." And, "a one-off EU divorce bill of, some suggest, tens of billions of euros, compared with EU-UK trade worth well over €600bn euros every year, the economic case for making rapid progress on a trade agreement is clear." She urges that "economics cuts through the politics" in the discussions. And, "the business community – in the UK and the EU – is united in wanting an agreement with as few barriers as possible. Yet without an agreement, we’d lose together." And, "for both sides, leaving the negotiating table without a deal shouldn’t be ‘Plan B’ but ‘Plan Z’".

ECB to stand pat today

ECB is widely expected to keep monetary policies unchanged today. The first round result of French presidential election, and centrist Emmanuel Macron’s high chance of winning the run-off should give ECB much relief. Nonetheless, the central bank is still not ready to hint on any stimulus exit yet. ECB President Mario Draghi has stressed enough that there are much downside risks to the economy, and underlying inflation stayed low. Risks are still tilted much to the downside in spite of the French election results. Meanwhile, various ECB officials have clearly expressed that the course of monetary policies are set for 2017. The central bank will continue with its EUR 60b per month asset purchase till the end of the year. And it’s unlikely that policy makers will opt for a rate hike before the asset purchase ends. We’d expect the speculation and debate on exit to start heating up again in June.

Elsewhere

Australia import price index rose 1.2% qoq in Q1, much higher than expectation of -0.5% qoq. Swiss will release trade balance in European session. Germany will release Gfk consumer sentiment and CPI. Eurozone will release confidence indicators. UK will release CBI reported sales. From US, trade balance, wholesale inventories, durable goods orders, jobless claims and pending home sales will be featured.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3568; (P) 1.3568; (R1) 1.3647; More….

A temporary top is in place at 1.3647 after USD/CAD fails to sustain above 1.3598 key resistance. Intraday bias is turned neutral first. Some consolidations should be seen but downside of retreat would be contained by 1.3410 support to bring another rally. Break of 1.3647 will extend the whole medium rise from 1.2460 to next medium term fibonacci level at 1.3838. However, break of 1.3410 will turn bias back to the downside for 1.3222 support instead.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. The first leg has completed at 1.2460. The second leg from 1.2460 is likely still in progress and could target 61.8% retracement of 1.4689 to 1.2460 at 1.3838. We’d look for reversal signal there to start the third leg. However, break of 1.2968 will argue that the third leg has already started and should at least bring a retest of 1.2460 low. Meanwhile, sustained trading above 1.3838 would pave the way to retest 1.4689 high.

Economic Indicators Update