Sentiments Lifted by Renewed US Tax Reform Hope, But Dollar Yet to Confirm Trend Reversal

Markets sentiments were given a strong boost as the US appears to be breaking the tax reform deadlock. DOW closed up 196.14 points or 0.90%. S&P 500 also rose 24.14 points or 0.00% to close at 2452.51. 10 year yield gained 0.035 to close at 2.215, back above 2.2 handle. The development also gave the greenback a mild lift but there dollar index is held well below key near term resistance at 94.28. In the currency markets, EUR/USD is considered as staying in consolidation from 1.1908 and near term up trend is expected to resume sooner or later. USD/JPY is staying below 110.94 and recent fall from 114.49 is expected to extend too. There is no clear evidence for a trend reversal in Dollar yet.

House Speaker Ryan: Tax reform is far easier

In US, House Speaker Paul Ryan reiterated that tax reform is different from healthcare reform. The former is "far easier" to pass as Republicans, which is control of both the House and the Senate, have built a consensus. He added that, for the sake of procedural simplification, the entire tax reform bill could be rolled into one bill. Meanwhile, some media reports revealed that Trump’s administration and congressional leaders have reached a consensus on how to reduce individual and corporate tax rates. They have also hammered out a more extensive reform plan which is more concrete and than the one released in July. Meanwhile, the market seemed to be more confident that US congress would be able to raise the debt ceiling and the government would not default on its debt.

Fed agreed to keep discount rate unchanged unanimously

Minutes of Fed’s discount rate (not federal funds rate) meeting on July 25/26 showed that all of Fed’s 12 regional banks decided to keep discount rate unchanged at 1.75%. The minutes showed that policy makers wanted to wait and "assess whether incoming data support the current outlook for continued moderate economic growth, some further strengthening in labor market conditions, and a gradual return of inflation to 2 percent over the medium term." The discount rate is the interest rate charged by Fed on collateralized loans. The more commonly referred federal funds rate is the interest rate on the overnight borrowing of reserves, the interest rate that depository institutions – banks, savings and loans, and credit unions – charge each other for overnight loans.

UK May softens stance on European Court of Justice

In UK, it’s reported that Prime Minister Theresa May is softening her stance on EU Court in Brexit negotiation in hope of speeding up the process to trade agreements. May was clear with her stance that UK could "take back control of our laws and bring an end to the jurisdiction". But now, May said that UK will avoid European Court of Justice’s "direct jurisdiction". That is seen as a compromise for ECJ to have some say in governing and any post Brexit dispute. And of course, there could still be some influence from ECJ on UK laws.

On the data front

Japan PMI manufacturing rose to 52.8 in August, up from 52.1 and beat expectation of 52.3. That’s also the highest level in six months. Markit noted that expansion in the Japanese economy "continues to be supported by a mix of strengthened demand from both domestic and external sources: public work projects and stronger sales to South East Asia were both reported by panellists as areas of growth in August."

Eurozone PMIs will be the main feature in European session. US will also release PMIs and new home sales.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.2527; (P) 1.2560; (R1) 1.2596; More….

A temporary low is in place at 1.2525 in USD/CAD and intraday bias is turned neutral first. Deeper fall is expected as long as 1.2690 minor resistance holds. Below 1.2525 will target 1.2412 first. Break there will resume the larger decline and target next long term fibonacci level at 1.2048. On the upside, above 1.2690 will extend the correction from 1.2412 with another rise. But we’d expect upside to be limited by 38.2% retracement of 1.3793 to 1.2412 at 1.2940 to bring fall resumption eventually.

In the bigger picture, price actions from 1.4689 medium term top are seen as a correction pattern. Such corrective fall is still expected to extend to 50% retracement of 0.9406 to 1.4869 at 1.2048. At this point, we’d look for strong support from there to contain downside and bring rebound. Nonetheless, on the upside, sustained break of 1.2968, 38.2% retracement of 1.3793 to 1.2412 at 1.2940 will be the first sign of completion of the correction and will turn focus back to 1.3793 key resistance.

Economic Indicators Update