USD supported by Trump's tax reform plan; NZD the only major currency that has managed to gain against the USD, with gains on all the crosses

By Jason Wong

With US tax reform and Fed hikes on the minds of investors, global rates are a lot higher and the USD is broadly higher, except against the NZD, which has recovered some its post-election sell-down.

Overnight, Trump released a 9-page tax reform plan that has widespread backing from his fellow Republicans, a step-up from the 2-pager he released several months ago.  Details of the plan were leaked out yesterday, and this supported the USD during local trading, and further progress was made overnight.  The plan includes a cut to corporate tax from 35% to 20% and cuts to individual tax rates, but leaving to Congress the decision of whether to create a higher tax bracket for top earners.  A one-off tax reduction for companies to repatriate offshore profits was included as well as removal of some deductions and general tax simplification measures.

There are still a number of hurdles to get the tax plan into law and the overall quantum of fiscal stimulus is still unknown, but the market sees the plan as good enough to add to the chance of further Fed tightening, which has been well under-priced relative to the FOMC’s Fed Funds rate projections.  The odds of a Fed hike in December have nudged up further, now close to 70%, while rates have risen across the US Treasury curve, with the 2-year rate up 4bps to 1.47%, its highest level since 2008 while the 10-year rate is up 7bps to 2.305%, its highest level since early August.  This has spilled over into other markets, with UK and Germany 10-year rates up 5-6bps as well.

Supported by the tax plan, the USD has continued its recovery, seeing the TWI majors index up 0.4%.  In economic news, US durable goods orders data were solid, while pending home sales data were soft, even excluding the impact from the Hurricanes.  One of the biggest losers has been the CAD.  BoC Governor Poloz’s first speech since his second rate increase was seen to be dovish by the market, as he highlighted uncertainty about the outlook and puzzles in the data, and he said that the bank would proceed cautiously from here.  He added that the rising currency could complicate the inflation outlook.  USDCAD is up 0.7% to 1.2430.  EUR, GBP, AUD and JPY have all lost about 0.2-0.4% against the USD.

The NZD is the only major currency that has managed to gain against the USD, showing signs of recovery after underperforming in the post-election aftermath.  Whole milk powder futures have moved up since the end of last week and the second contract added 2.8% yesterday, which is a supporting factor.   The market might be factoring in a softer path of dairy production in NZ after the very wet winter.  The NZD sell-down post-election also seemed overdone.  Alongside the NZ rates market, NZ equities have been unperturbed by the result, putting on gains for the third consecutive day and piling on 1.3% over that time to reach a record high.

The NZD is currently around 0.7230, with gains on all the crosses.  We’ve seen a fairly steady climb in NZD/AUD up to around 0.92.

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