USD is weaker against all the major currencies, but remains within recent ranges; NZD remains around 0.7000 USD; US yields edged a little higher, in sympathy with the move in stocks

By Nick Smyth

US stocks pushed ahead to new highs overnight ahead of the US Senate and House votes this week on the long-awaited tax plan.  The USD is weaker against all the major currencies, but remains within recent ranges.  There was no major data overnight.  The NZD remains around 0.70. 

US stocks continued on from Friday’s move higher, when US senators Rubio and Corker declared their intention to vote for the US tax bill.  The S&P 500 is up over half a percent overnight.  The House is due to vote on the bill Tuesday and the Senate on Wednesday, with President Trump expected to sign the bill into law later in the week.  Media reported yesterday that Republican Senator McCain will not be able to vote on the bill due to ill health, leaving the Republicans with a 51-48 majority in the Senate.  But with Rubio and Corker seemingly on-side, and another wavering Republican senator, Susan Collins, reported to have secured the amendments she wanted, the market anticipates that the Senate vote will be successful. 

The positive sentiment towards the US tax bill hasn’t helped the USD though; it’s down against all the major currencies.  The USD remains broadly in a range and with the Christmas holidays approaching, it’s hard to see that changing until the New Year.  The NZD is still hovering around 0.70, having traded a very tight range overnight. 

US yields edged a little higher, in sympathy with the move in stocks, with the 10 year US Treasury up 2 basis points.  Although it steepened a little overnight, the US yield curve remains near its flattest since 2007.  Overnight, Fed President Kashkari mentioned the flat US yield curve was one of the reasons he dissented against a rate hike last week.  Historically, an inverted US yield curve has preceded US recessions, although Fed Chair Yellen noted in the FOMC press conference last week that the curve is still positive (the spread between the 2 year and 10 year US Treasury yields is 55 basis points) and she sees the risk of recession as low. 

The annual rotation of regional Fed presidents means Kashkari will not be voting on the FOMC next year.  San Francisco President Williams will an FOMC voting member next year, and he noted voted in an interview overnight that three hikes in 2018 was a “reasonable view” in light of the strong US economic momentum.  The market prices around 2 hikes for 2018, with a better-than-even chance the next one comes in March. 

Looking ahead, the main focus will be the Senate vote on the US tax bill, expected on Wednesday.  The BoJ meets on Thursday where it is expected to reaffirm its commitment to its  “yield curve control” policy.  The main interest will centre on Kuroda’s press conference and any discussion on next year’s policy outlook and the current 0% ‘target’ for the 10 year yield.  In Europe, we receive the IFO Business Survey tonight, which is expected to indicate continued strong economic momentum in Germany.  Closer to home, the minutes to the RBA’s December meeting will be released today. 

While the data calendar offshore this week is sparse, there is plenty to focus on domestically.  Yesterday, ANZ consumer confidence showed a small fall while the PSI edged a little higher, although neither Survey surprised enough to move markets.  The focus today will be the ANZ Business Survey, which fell sharply last month in the wake of the formation of the Labour-led coalition government.  We get another Global Dairy Trade milk auction tonight.  Later in the week, we receive Q3 GDP, where we are expecting an above-consensus 0.7% for the quarter. 


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