USD strengthened across the board as the markets priced in a greater likelihood of the tax bill passing; US yield curve resumed its flattening trend; USD strength saw the NZD drift back below 0.70; GBP was one of the worst performing currencies

By Nick Smyth

US stock indices rose to new record highs on Friday and the USD strengthened across the board as House and Senate Republicans agreed on a final version of the tax bill for vote this week.  Republican senators Bob Corker and Marco Rubio both indicated they would vote for the bill this week, giving the market greater comfort that it would pass the Senate vote and ultimately be enacted.  The NZD has stabilised around 0.70 as we await a raft of domestic data this week. 

The tax bill was officially released after the market close on Friday, although most of the details had already been leaked earlier in the week.  The corporate tax rate will be cut to 21% from 35%, effective next year, although US corporates will lose some of their tax deductions.  The bill also includes cuts to personal tax rates (which will expire in 2025).  Republicans agreed to boost the child tax credit, which Senator Rubio said means he can now vote for the bill when its presented to the Senate this week.  Senator Corker, who originally voted against the tax plan amidst a running spat with President Trump, said on Friday he would support the bill too.  The Republicans have a narrow 51-49 majority in the Senate and thus can’t afford many defectors.  The market took the news that Rubio and Corker would vote for the bill positively with US stocks pushing to fresh record highs; the S&P 500 was up almost a percent. 

The USD strengthened across the board Friday evening as the markets priced in a greater likelihood of the tax bill passing.  US short end yields rose as well and the US yield curve resumed its flattening trend (the US 2 year rate is up 2 basis points while the US 10 year rate is unchanged).  The rates market seems to imply that the fiscal stimulus will lead to a short-term pick-up in growth, which will endorse further Fed tightening, without doing much for longer-term growth. 

The USD strength on Friday night saw the NZD drift back below 0.70.  The NZD again traded in a relatively narrow range.  The NZD increased on most of the crosses, with the NZDAUD up to near 0.9150 and NZDEUR approaching 0.60. 

The GBP was one of the worst performing currencies on Friday, despite EU leaders officially agreeing to move to the next phase of Brexit talks, focused on the terms of a transition arrangement for after March 2019 and ultimately on a trade agreement.  The GBP was down almost a percent against the dollar.  German Chancellor Merkel commented that “the most difficult phase is ahead of us”, although that shouldn’t really surprise anyone.  UK media reported that the government intends to hold a parliamentary vote this week to enshrine 29 March 2019 as the date the UK leaves the EU, although may again be voted down.  While recent defeats in the House of Commons highlight the weakness of the Theresa May’s government, the fact that parliament will have a greater say in the process raises the likelihood of a softer Brexit, in our opinion (the majority of parliamentarians supported “remain” in the referendum). 

Locally, we will receive a number of important data releases this week.  The highlight will be GDP which is released on Thursday. We are anticipating an above-consensus 0.7% increase for Q3.  The ANZ Business Survey will also attract attention when it is released on Tuesday.  Last month’s Survey showed a sharp fall in confidence after the formation of the Labour-led coalition, and we will be interested to see whether there is any bounce back this month.  Net migration, the trade balance, consumer confidence and another dairy auction are also released.

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