STO - Tax reform prospects cheer greenback

The dollar found meaningful support yesterday off the back of promises of a major tax overhaul by Donald Trump. Although any detail was rather lacking, the market seems to be bidding that sweeping tax cuts for corporates and individuals will help fire the economy - rather than further bolster national debt – and as such we saw some big moves as a result, including USD/JPY pushing out to levels not seen since the start of the month.

Notably better than expected trade balance data from China in the past few hours has given the Aussie dollar a boost, with AUD/USD recovering losses both off the back of Trump’s tax reform chatter earlier yesterday and also weakness seen in the wake of the RBA’s policy statement. This news from China has also helped to overshadow Australian home loans data, which fell short of expectations and again could be seen as a sign of wariness amongst consumers – talk of recession may be disappearing, but given the unknown of US trade policy we shouldn’t be wholly discounting the idea just yet.

After a relatively quiet week for economists in London, there’s a slew of UK data due for release at 9.30am GMT, including manufacturing production and the trade balance prints for December. Cable remains on the back foot, whilst EUR/GBP is perhaps looking a little undervalued, so there should be some direction emerging off the back of these numbers regardless of the sentiment conveyed. On top of this, we also have a quarterly GDP estimate scheduled for 3pm GMT this afternoon and again even an overshoot of just 0.1% here could be sufficient to inject some renewed confidence into the currency.

Yesterday’s tax talk from Trump had limited bearing on the fortunes of USD/CAD, but Canadian unemployment data due at 1.30pm GMT could paint a rather different picture here. Any signs that uncertainty over trade ties across the border is weighing on domestic business confidence could serve to knock USD/CAD back towards those highs we saw late last year.

This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as an Investment Advice.

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