Fundamental Analysis

Tax Titillation Drives Dollar

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There are few things a market likes more than a tax cut but that's what was dangled on Wednesday and the US dollar bulls bit hard. USD was the top performer again while the New Zealand dollar and euro lagged. Interestingly, US stocks were muted. Australian employment and Chinese industrial production are due up next. A new USD trade has been posted ahead of a busy 2 days of BoE decision (MPC minutes, US CPI and retail sales).

The great promise of the Republican win 10 months ago was a tax cut, but the market lost faith after the Obamacare repeal failure general disarray the White House. The dollar suffered as a result.

Hope wasn't lost. Mnuchin and Cohn have been quietly working on the details and now the effort has begun. Trump's across-the-aisle efforts to raise the debt ceiling have some thinking the equation has changed. He will meet with top Democrats for dinner later today where he will talk more about tax reform. The aim is to have a plan ready for September 25 and a report today said Trump was insistent on a 15% corporate tax rate.

That talk kept the US dollar momentum going as it rose to 110.69 against the yen and sent EUR/USD below 1.1900. Along with soft UK wage data, the strong dollar also helped to retrace all the cable gains from Tuesday. At the moment, a tax break is the best hope for a sustained dollar rebound. It will be a treacherous path but we will be watching closely.

On the near-term calendar is a speech from the RBA's Debelle at 2315 GMT but the main event comes at 0130 GMT with Australian jobs for August. The market isn't sure which way the RBA is going to go but a beat on the +20.0K would make it easier for the RBA to embrace a hawkish bias.

Continued strong signs from China would also be welcome. August industrial production is expected to rise a solid 6.6% y/y with retail sales up 10.5% y/y. That split shows how China is successfully shifting to a consumer-led economy, at least so far.

Author: Ashraf LaidiWebsite: http://ashraflaidi.com/
Ashraf Laidi
Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.
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