USD rallies after US Senate passes tax bill
The US dollar has been rallying strongly since the market opening this morning. The greenback extended gains against all its G10 peers, rising the most against the Japanese yen and the Swiss franc (+0.65% both), the New Zealand dollar (+0.45%) and the Swedish krona (+0.38). On Saturday, the Senate finally approved the US tax-reform proposed by Donald Trump. The outcome of the vote was very close as the bill passed by a vote of 51 to 49. No democrats voted for the bill.
After months of struggle, this is the first victory for Donald Trump since he took office more than a year ago. However, the final bicameral version may take some time to come up, as the Senate and the House of Representatives have to find common ground. Potentially, the bill could lead to a reduction of the corporate tax rate to 20% (compared to 35% currently), in addition to a cut for individuals as well.
We have been waiting for this signal for quite some time. However, it seems that the news come a little late as investors have already shift attention to the ECB’s tightening move and the economic acceleration in the euro zone. We expect the single currency to keep appreciating against the greenback. On the other hand, high quality commodity currencies, such as the Aussie and the Kiwi, should suffer from narrowing interest rate differentials against US yields. EUR/USD is currently trading at around 1.1850, slightly below the 1.1961 resistance (high from November 27th). On the downside, a support lies at 1.1809 (low from November 30th).
Switzerland: Sight deposits decline
The Swiss franc keeps on weakening against the euro and is now trading below 1.17. Late last July the EUR/CHF pair jumped from 1.10 to 1.15 and since the pair continues rising. This morning the sight deposits have been released and it seems that at current levels, the SNB is less under pressure. Indeed sight deposits have slightly declined.
There is still nonetheless the fear of deflation and tomorrow will also see the release of the consumer prices for November. Inflation is coming back and we clearly believe it is a matter of time before imports create inflation. The Swiss economy is very resilient and the abandon of the peg is not a bad news any more.
On top of that, the EURCHF should continue to be bullish as markets are still very positive regarding the ECB monetary policy. In addition, even though we believe that the European economic uncertainties will largely weigh on the euro in the longer run. In the short to medium-term, there is a clear possibility to reach 1.20.
RBA and BoC meeting
For their final meeting of the year the RBA is expected to hold its policy rate at 1.5%. While not like to shift the RBA policy path the recent bout of weak housing data, retail sales and disappointing wage growth are clear downside risks to the economy (ie RBA outlook). Activity data has improved but concern over wage deceleration will push communications away from tighten monetary policy. The softness does suggest that we could hear a dovish RBA. Markets are not pricing in a rate hike until 2019, therefore dovish tone will have limited effect on AUD.
The Banks of Canada meeting does have the possibility of a surprise. The BoC has a recent history of surprising the markets with bot cuts and hikes. Heading into December there was only 10% probably of a hike yet stronger economic data has pushed pricing to 20%. In the BoC financial stability report, the banks discussed the high valuation and overleverage household as a primary risk. Gradually higher interest rate would help reduce these risks. With CAD weaker then September tighter policy, will unlikely raise red flags at the BoC. We suspect that market in underpricing the risk of an unexpected rate hike. That said, we are main bearish on comity currencies and Thursday OPEC meeting have been unable to break key technical resistance levels.
