US Tax Plan Encounters Teething Issues. Euro Higher on Yields

We saw Dollar buying in some pairs overnight as the US House of Representatives passed the final version of the US Tax plan, however, after the vote, it came to light that some clauses violated Senate Rules. This meant that the bill couldn’t go to the final stage of Senate voting, but had to go back to the drawing board, get tweaked, then go back through the House and on to the Senate. This caused the Dollar to give back some of its gains. We are coming down to the wire, however, it is still more likely to go through this side of Christmas.

We are hearing negative comments from some economists saying the bill will not have much effect on the economy, and what effect it will have is already priced in. I tend to disagree. The dollar index is sitting near 93.50, well below where it started the year up near 104 after the ‘Trump Rally’ which was based mainly on the hype of these tax cuts we are about to see. In an economy that is nearing full capacity in the employment market (around 4% unemployment), and struggling to find inflation, at least a meaningful proportion of these 14% corporate tax cuts (from 35 to 21%) will be spent on hiring new talent or boosting current salaries. Once we see wage inflation, we will see the Fed start to get a lot more hawkish, and from then on the greenback is likely to go one direction, UP.

We also had US building permits come in at 130 vs 127. But failed to spark a huge rally on Tax bill concerns.

The Kiwi has had a run of bad luck in the run up to Christmas. After a poor consumer confidence read yesterday we saw weak trade figures this morning causing the flightless bird to break below the lows its held all week. The only saving grace is a GDP release tomorrow which is expected to come in a 0.6%. Bar a strong beat there, we are picking that the Aussie and Kiwi should come under a bit of pressure over the Xmas break as they have both had strong runs in December and failed multiple attempts to create new highs. US tax reform news could seal their fate to finish off 2017.

The Euro has bucked the trend, taking on the dollar and pushing higher. This is on news that Germany will issue new 30 year bonds next year. Long-dated bonds, having higher yields as a reward for locking away cash for long periods, then lift rates and attract currency follow into the Euro.

We also saw a false break of a well respected long-term trendline in the Cad. This is typical of holiday markets. Traders fish for stop losses above or below trendlines, which causes the price to shoot away and return back to the previous range. The trigger of this could be concerns around NAFTA talks as Canada sells 75% of its goods to the States. This could also be around OPEC worries and the effects on Oil.

We have a relatively quiet day ahead. Other than the aforementioned NZ GDP, we have BoE Governor Craney speaking and the BoJ tomorrow. Both events not expected to cause any huge shockwaves. Dollar bulls will be hoping that Lawmakers are burning the midnight oil tonight, revising the US tax plan for a vote tomorrow, however, we are unclear on timing, but we do know the days are certainly running out before Christmas.

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