The main catalyst for US dollar bulls over the past 2 months has been tax reform, but that could also be the catalyst for the bears as Ashraf indicated here and here. The yen was the top performer Wednesday while the US dollar lagged. New Zealand retail sales beat estimates in early Asia-Pacific trading.
For months various markets have been pricing in changes to the US tax code. It's impossible to say exactly what's priced in but it's clear that passing something is more likely than ever. So why the US dollar weakness?
We've been writing this week about the divergence between stock markets and USD/JPY. In the past , there has been a solid correlation between the pair and equity prices. Recently, however, the S&P 500 and Nikkei have soared while USD/JPY has languished.
One theory is that traders are wary of 'selling the fact' and getting out of the way early. Perhaps that's true. Another is that the Fed is increasingly getting worried about low inflation. Today's release of the FOMC minutes showed some members want to hit the pause button after a December hike and wait for inflation to get closer to target. There is probably some truth in that as well.
Back to the tax story. The dollar is selling because of the tax plan. More specifically, the details of the plan. It's increasingly clear this isn't a broad-based tax cut. It's heavily skewed to corporations and the top earners, while offering little to the vast majority of Americans. See Ashraf's notes on the disappointing tax holiday for US multinationals and rising cost of debt in the aforementioned pieces.
Maybe the market is saying that this plan isn't going to boost incomes, wages, investment or growth. Instead it will add to the deficit and lead to spending cuts down the road. What it will do is boost corporate profits and that explains the rosy reaction in stocks.
Whatever the reason for the dollar selling, the USD/JPY chart sent a major signal Wednesday. It broke the 100-day and 200-day moving averages, along with the October low in a 125 pip drop. It was part of a broad dollar rout. It's tempting to brush aside because of the US holidays but this move is too big and long-lasting to ignore.
Looking ahead, the Asia-Pacific calendar is light. Early in trading the Q3 New Zealand retail sales report showed a 0.2% rise excluding inflation. That's better than the +0.1% expected and the kiwi caught a small bid on the release.