Dollar Pared Gains on Rumor of Delay to Corporate Tax Cut

Dollar weakens overnight on report that Senate Republicans are considering to delay corporate tax cut by a year. The greenback pared back some of this week’s gains and turned mixed for the week. EUR/USD led the way down yesterday but breaking 1.1574 support. But equivalent move was not seen in other dollar pairs. USD/CHF was held below 1.0037 near term resistance. USD/JPY also failed to sustain above 114.44/9 zone. And even AUD/USD is held above 0.7624 support. Dollar is still waiting for inspiration for a firm breakout from consolidations. Meanwhile, Sterling and Yen remains the strongest one for the week so far.

House and Senate versions tax bill could differ significantly

In the US, House Ways and Means Committee Chairman Kevin Brady, Republican, said that the tax bill will be brought to floor next week and "our goal is to pass it next week out of the House". Meanwhile, Senate Republicans are expected to unveil their own version of the tax bill at the end of the week. The Senate version is expected to be drastically different from the House version. In particular, it’s reported, with no named source, that Senate Republicans are considering to delay the implementation of corporate tax cut by one year to comply with Senate rules. In the coming days, markets’ attention will be on how far apart the versions are, and thus, the work to reconcile them.

Separately, rating agency Fitch predicted that the tax plan would pass in both chambers. However, Fitch warned that "Such reform would deliver a modest and temporary spur to growth. … However, it will lead to wider fiscal deficits and add significantly to U.S. government debt." And Fitch is reviving up medium-term US government debt forecast.

Trump’s new Fed Governor Quarles wants "fresh look at everything"

New Fed Governor Randal Quarles made his first public remarks yesterday. He urged to have a "fresh look at everything" and pledged to make regulatory process more transparent "in a very short period of time". He added that "one of the reasons for transparency is part of the basic view of the relationship between the government and the governed. If there are going to be rules, we should probably let the people know what they are." And for example, stress testing is "on the front burner" and the "tenor of supervision" to changes. Quarles is US President Donald Trump’s first appointment to the Fed board and there are still three remaining vacancies.

Fed chair Yellen urged high ethical standards

Fed chair Janet Yellen was honored with former Fed chair Ben Bernanke with this year’s Paul H. Douglas Award for Ethics. In the ceremony yesterday, she emphasized that "the Federal Reserve’s very effectiveness in setting monetary policy depends on the public’s assured confidence that we act only in its interest". And he urged Fed officials to "demonstrate our ethical standards in ways that leave little room for doubt." She pointed out that Douglas was the first public officials in the US who published a full accounting of his own personal finances back in 1939. And, she noted Douglas believed that "the public’s trust was so fundamental to the effectiveness of government that such steps were appropriate."

BoC Poloz: No de-anchoring of inflation expectations

BoC Governor Stephen Poloz there is no evidence of "de-anchoring" of inflation expectations but reiterated that the central bank wold be cautious in further interest rate moves. Also, he pledged to monitory the developments in the economy after two rate hikes earlier this year. Meanwhile, he pointed to encouraging signs of wage growth in October’s job report. But he emphasized that "a lot of pieces need to fall into place before we can be certain that the economy has made it all the way home."

ECB splits on pledge to maintain asset purchases

In October ECB meeting, the central bank announced to half monthly asset purchase to EUR 30b and extend the program by nine months till September. Euro responded negatively to the pledge that the program will continue until "a sustained adjustment in the path of inflation consistent with its inflation aim". It’s now reported that Executive Board member Benoit Coeure, Bundesbank Head Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau objected to maintaining that language. Instead, they pushed for tying the overall level of monetary stimulus, rather than the asset purchase program alone, to economic outlook. The main implication to the change is that ECB could end the asset purchase program even if inflation doesn’t pick up. However, it’s opposed by ECB chief economic Peter Praet. The report is mainly seen as a confirmation of the split ECB officials regarding the path forward in 2018, at this juncture of stimulus exit.

On the data front

China trade surplus widened to USD 38.2b in October, or CNY 254b. The calendar remains light as Canada housing starts and building permits will be featured.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7614; (P) 0.7657; (R1) 0.7687; More…

AUD/USD is still holding in range above 0.7624 support and intraday bias remains neutral at this point. More consolidation could still be seen. But after al, near term outlook stays bearish with 0.7896 resistance intact and deeper fall is expected. Decisive break of 0.7624 will resume whole decline from 0.8124. And, AUD/USD should target next key cluster level at 0.7322/8 next.

In the bigger picture, corrective rise from 0.6826 medium term bottom is likely completed at 0.8124, after hitting 55 month EMA (now at 0.8067). Decisive break of 0.7328 key cluster support (61.8% retracement 0.6826 to 0.8124 at 0.7322) will confirm. And in that case, long term down trend from 1.1079 (2011 high) will likely be resuming. Break of 0.6826 will target 61.8% projection of 1.1079 to 0.6826 from 0.8124 at 0.5496. This will now be the favored case as long as 0.7896 near term resistance holds.

Economic Indicators Update