The US stocks were resuscitated after the White House announced that the US corporate taxes will be cut by 15% as part of Donald Trump’s ‘major’ fiscal plans. According to the latest news, the personal income taxes will also be reduced. More details are due at Wednesday’s announcement. Donald Trump will prioritize the tax cuts over the budget deficit. In this respect, the US debt ceiling should be adjusted to avoid an eventual government shutdown. Nevertheless, the early highlights regarding the very much expected tax reforms pleased the private sector investors. The optimism is back in the US markets.
The US stocks rallied to three-week highs on early indications concerning the Trump’s tax reforms. The Dow Jones traded just shy of $20,800 in New York. The S&P 500 advanced to $2’377. The US stock rally could continue until the official announcement due on Wednesday.
The Dow is called 46 points firmer at $20,810 at the New York open.
The US optimism helped the Asian stocks higher on Tuesday’s trading session. Nikkei (+1.08%) and TOPIX (+1.09%) closed the session in the green, as the USD/JPY took over the 110.00 mark into the end of the trading session in Tokyo.
Hang Seng gained 1.20% and even the Shanghai Composite (+0.16%) remained in the green, despite recording the worst day of the year on Monday.
The enthusiasm spread over the European stocks traders. The DAX 30 hit a fresh all-time high for the second consecutive session following the first round of the French election.
The FTSE is better bid along with the energy stocks (+0.25%), as oil prices recovered for the first time following eight straight sessions of losses.
USD firmer on heightened Fed June hike expectations
Donald Trump’s fiscal plans also revived the Federal Reserve (Fed) hawks. The US’ expansive spending plans are expected to keep the Federal Reserve (Fed) alert regarding the monetary conditions across the country. The Fed could be brought to steepen its rate tightening policy, along with its balance sheet shrinkage plans to avoid an undesired overheating in the US economy.
Although the US 10-year yields remained stable at about the 2.30% level, the expectations of a Fed June hike rose to 66.5% from 43% seen a week earlier. It is implicitly assumed that exceeding the 80% probability, an interest rate hike becomes a real consideration for the Fed.
The US dollar firmed against all of its G10 counterparts; the Canadian dollar (-0.50%), the kiwi (-0.86%) and the yen (-0.51%) were the leading losers over the first trading day of the week.
Canada’s got a headache due to the US’ softwood taxes
The Canadian dollar stood among the worst G10 performers against the greenback on the additional news that the Canadian softwood imports to the US will be taxed at 24% versus 3% till now.
The sharp increase in the tariffs could result in multi-billion dollars gap in the Canadian export revenues from the softwood lumber. The Canadian producers currently hold a third of the market and generate roughly 5 billion US dollars each year.
If we extend the risks to the entire market, the picture gets naturally more troubling.
In 2016, the exports to the US stood for the 78% of Canada’s total exports. If the trade war between the two trade partners deepens, both countries could come out with significant damages in the medium to long-term.
Combined to the broad based USD appreciation, the USD/CAD reached its highest levels since December. Stronger positive trend indicates a renewed pressure on the 1.40 resistance. Whether the short-term uptrend could extend beyond this level will also depend on developments in the US markets and oil prices.
Two factors to encourage a stronger USD/JPY
Despite the broad based USD appreciation, the USD/JPY traded below the 200-day moving average the majority of the Tokyo session and remained capped at the 110.60-resistance (minor 23.6% retracement on December – April).
The daily MACD (Moving Average Divergence Converge) is still pointing at a negative trend, yet the USD/JPY-bears could be losing momentum.
Two factors could inspire a renewed recovery attempt in USD/JPY.
First, the broad based US dollar strength and improved US yields could encourage the capital to flow from the yen to the US dollar. The risk-on mood could reinforce the volumes.
Second, the Bank of Japan (BoJ) will meet on Thursday and is expected to maintain the status quo, which would inevitably mean a wider divergence between the Fed and the BoJ’s policy outlooks. Governor Kuroda told the markets that the BoJ will keep its monetary policy easy until the 2% inflation target is reached. Due on Friday, the Japanese inflation ex-fresh food, has certainly remained unchanged at 0.2% year-on-year, comfortably far from the BoJ’s mandate goal.
In the light of the above stated reasons, the current levels could encourage the dip-buyers to re-challenge the 110.60 resistance, and if surpassed, could suggest a further rise toward the critical 112.13 (major 38.2% retracement). Up to this level, the USD/JPY recovery will have no technical impact on the mid-term negative trend. Above 112.15, the mid-term bullish reversal could either encourage a further appetite for the 115.00 mark, or trigger a temporary downside correction.