USD: Overcoming hurdles – Rabobank

In view of Jane Foley, Senior FX Strategist at Rabobank, the near-coincident timing of the news that the Senate has passed its tax reform bill and that former national security adviser Flynn pleaded guilty to lying to investigators regarding his communications with Russia has complicated the outlook for markets. 

Key Quotes

“Despite the whipsawing price action on Friday the USD has opened the week broadly stronger on the back of expectations that tax reform will lift US growth and inflation potential.”

“As its stands there is still a lot of work to be done in Washington to close the gaps between the two tax bills delivered by Congress and the Senate.  Until it is complete it will be difficult for economists to fully analyse the economic impact of the tax changes.   That said both bills include a reduction in the corporate tax rate to 20% from 35%, albeit that Congresses bill favours an immediate implementation and the Senate bill endorses a delay.  According to our modelling of a change to US corporation tax, in the case of an immediate implementation of the cut (in Q1 2018), US growth is likely to peak at 4.5% q/q saar during the course of 2018 and the boost is set to last around two years.  If there is a delay, a growth slowdown could occur next year on the back of higher long-term interest rates and then the boost to growth could be more marked in 2019, though we still expect the impact to last around 2 years.”

“The USD can be expected to find support on the back of a faster growth rate on the back of expectations that the Fed could hasten its policy tightening.  That said, since a stronger USD will imply a tightening of monetary conditions the Fed may not need to follow through will a significantly changed course – a factor which could ultimately disappoint the USD bulls.”

“Broadly speaking we are moderately bullish for the USD against a range of currencies for 2018. Having been very optimistic about the prospects for growth in the US at the start of Trump’s Presidency, the market spent most of 2018 paring back its USD positions.”

“In September, however, USD bulls found a new lease of life on the back of reinvigorated tax reform optimism and this has allowed the USD to be one of the best performing G10 currencies in this time frame.  The USD has also performed well against E.European and Latam currencies in this time horizon.  That said, in the last few week currencies such as the EUR, CHF, GBP and JPY have taken back some ground vs. the USD indicating that the outlook for the greenback is still far from plain sailing.”