The US dollar rally is finally here
The greenback has been rallying strongly over the last two days amid building expectations the Fed will hike the federal fund rate target by another notch in December together with expectation Donald Trump will finally passes his tax reform which aim mainly at lowering the corporate tax rate from 35% to 20% and capping the one for individual to 35% from 39.6% among other specificities.
The US dollar surged across the board, adding gains against most of its peers. It gained the most against the pound sterling, the Swiss franc and the Japanese yen, rising 0.52%, 0.51% and 0.43% respectively. According to the probability extracted from the Fed funds futures, the probability of a rate hike in December has risen to 70%, compared to 63% a week ago.
The greenback also got a boost from Donald Trump amid an announcement made on Wednesday about a proposed rate tax cuts plan. Beside the tax cuts for individual and corporation, the proposal also mentioned an increase of the bottom tax rate to 12% from 10% currently and also the eventuality of a higher tax rate for wealthy individuals. It seems that this tax cuts plan will find a larger support among Congress members as its overall effect will be more balanced compared to what the Donald has proposed so far.
We were advocating, for quite some time now – that the USD was oversold and that the time was coming for a recovery. It seems that the time has finally come, especially against currency that profited extensively of the USD weakness. Currency such as the AUD, AUD and EM in general are potential subject to a broader correction.
Mario Draghi does not threaten Bitcoin
This was one comment that seems at first sight very bullish for the bitcoin, the most famous digital currency. Mario Draghi, in its statements to the European Parliament’s Committee on Economic and Monetary Affairs has mentioned that the European Central Bank has not the mandate to prohibit or regulate Bitcoin.
It is clear that big institutions are not in a hurry to regulate. We believe that the power of money creation is one very important power that are not going to be given up. Ironically, new derivatives are going to be introduced by next year on the Bitcoin and should, by the way, likely weigh on prices. The gold price has been driven lower by paper contracts. The ratio between paper and physical is currently higher than 200 according to the latest disclosure from the CME. One can perfectly imagine what impact it may trigger when derivatives are going to be introduced on Bitcoin.
Right now, the Bitcoin price is holding slightly below $4000 and there are upside pressures. The price is likely to rise again. We do not consider that this is a “tulip mania” the bubble name of the hyperinflation that occurred in Netherlands. It is rather another way to store wealth.
