As expected, the Trump administration rolled out its tax reform roadshow on Wednesday. Given the market’s lofty expectations, traders are viewing it as little more than a road map, rather than the much ballyhooed “big announcement”, because the statement did not provide any comprehensive details.
While the essence of the proposal is reflationary, and indeed dollar bullish in a very market-friendly, positive way, the argument remains for further clarity as to how the tax cut’s deficit ramifications will be offset. Fiscal reforms present a real revenue drain amidst disquieting concerns of the current trajectory for the US deficit. Look for the US administration to revisit the contentious attempt to repeal Obamacare, which will present yet another hurdle for risk.
As for the government shutdown, chatter suggests that legislators will need another week to settle their differences to avoid a shutdown, this despite reports suggesting otherwise. It is all a bit confusing and will likely go down to Friday’s deadline.
While dealers were connecting the tax reform dots, commodity currencies were sideswiped by a report in Politico that the Trump Administration is weighing an executive order to withdraw from NAFTA by officially starting a six-month review period. Predictably, the Canadian dollar and Mexican peso have weakened notably on this, but there has been lots of foreshadowing of this move, dating back to mid-March.
Amid all the soundbites, FOMC members have reiterated that they respond to data, rather than Trump uncertainty. The market, however, is responding to latter.
Canadian Dollar
Another tough day on the Canada post. While the CAD initially benefited from a larger drop in crude inventories, it was steamrolled by the NAFTA headlines. The bounce in WTI was then unwound after a Bloomberg report that Saudi Arabia was losing market share to Iran and Iraq. Traders now think that production cuts may not be extended, so the balancing act goes on.
Japanese Yen
Despite the USDJPY move overnight, the currency of choice remains the EURJPY, which should underpin the USDJPY near-term. We again find ourselves caught in a vortex of headline-driven trade, which tends to muddy the fundamentals. But with risk sentiment expected to reassert itself, it is challenging not to view the USDJPY going higher in this environment.
On the BoJ front, no changes.
Australian Dollar
The AUD has been beaten down after yesterday’s CPI report, which suggests that the RBA will remain accommodative for the foreseeable future and the acute bid that transpired on the USD post-US Tax rhetoric. The NAFTA talk has not only weighed on USDCAD overnight, as the market re-visits US protectionism and possible announcements on import tax policy.