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NZDUSD trading lower at 0.6880, as USD strength continued to dominate markets; USD supported by Trump's tax cuts; AUDUSD also traded lower to 0.7470 and NZDAUD is at 0.9215

Currencies
NZDUSD trading lower at 0.6880, as USD strength continued to dominate markets; USD supported by Trump's tax cuts; AUDUSD also traded lower to 0.7470 and NZDAUD is at 0.9215

By Jason Wong

US politics has dominated the overnight trading session, with a focus on Trump’s “massive” tax cuts.  This has seen broad USD strength, while the NZD and AUD continue to underperform.

With little on the global economic calendar the focus turned to the anticipated announcement from the White House on Trump’s tax package. This was released just before 6am this morning.  Earlier in the day, Treasury Secretary Mnuchin confirmed that the proposal included a corporate tax rate reduction to 15%, there was no support for a border adjustment tax and, importantly, lawmakers broadly agree on the need for a tax overhaul.  This helped drive the USD higher, but since the official announcement, the USD has come off its highs.

The tax reform package includes reducing the top individual tax rate from 39.6% to 35%, reducing the number of different tax brackets, and applying a 15% tax rate to corporates, businesses and partnerships.  After a one-time tax on $2.6 trillion of earnings that US corporates have parked offshore, the tax system would change to a territorial based system, meaning no extra tax on foreign earnings.  A lack of detail means that it is unclear if the tax cut will pay for itself or not, but it is clear that the government will be relying on a boost to economic growth to help fund the tax cuts.  There remains considerable doubt about whether the proposal in its current form would pass.

The other political news was that Politico reported the Trump administration is considering an executive order to end NAFTA, causing a negative reaction to the Mexican peso and CAD.

The NZD showed a steady fall in the lead-up to the official tax reform announcement, reaching a low of 0.6873, close to the strong level of technical support that has been in play since December. The NZD recovered to 0.69 in the immediate aftermath of the White House announcement, but has slipped again towards 0.6880.

NZD/AUD has been in a tight range, meaning that the AUD has followed a similar path and is down to 0.7470. Adding to AUD softness was a CPI outturn that largely met market expectations.  With the CPI not surprising to the upside as NZ’s release did, the inclination was to sell the AUD.  NZD/AUD is 0.9215, finding some support after a dip below 0.92 last night.

The NZD is down on all the other crosses continuing its recent theme of underperforming, not necessarily in line with the fundamentals.  GBP has even slightly outperformed the stronger USD, taking NZD/GBP down to 0.5360.  NZD/EUR is down to 0.6320.  Yesterday, in conjunction with colleagues at NAB, EUR and GBP forecasts were revised higher, which sees year-end targets for NZD/EUR and NZD/GBP revised down to 0.59 and 0.52 respectively.  Stronger economic data and a positive French Presidential election outcome will likely pave the way for the ECB to signal some normalisation in monetary policy, although not as soon as tonight’s ECB meeting.

The NZD has even underperformed the yen despite further gains in risk appetite.  NZD/JPY is down 0.7% to 76.7.


 

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1 Comments

This has seen broad USD strength, while the NZD and AUD continue to underperform.

The USD index is struggling to recover it's poise. Graphic view

Could one surmise NZ is struggling together with the Chinese to source much needed USD funding?

In the Journal’s formulation, the PBOC is directing affairs, sending out “instructions” that Chinese banks should “aggressively purchase dollars” ostensibly to punish those hot money speculators. Given what we know of copper and dollar financing in general, is that really the case? Is it not more likely that the PBOC has lost control of dollar conditions and was forced by the “market” to widen the daily band in order for dollar-starved banks to aggressively bid for dollars they could not otherwise obtain?

What all this data shows, as opposed to conjecture about the supernatural powers of central banks, is that yuan’s devaluation may be directly tied to dollar shortages. In fact, as I argue here, it is far more plausible that a dollar shortage (showing up as a rising dollar, or depreciating yuan) is forcing the PBOC to allow a wider band in order that Chinese banks can more “aggressively” obtain dollars they desperately need. Worse than that, the PBOC itself cannot meet that need with its own “reserve” actions without further upsetting the entire fragile system. Read more

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