The Australian dollar ended last week on a positive note as it finally walked out and up through the downtrend line from the 81-cent high to close at 0.7609.
But it is a little lower this morning as traders react to the news on Saturday that the US Senate finally passed its tax bill in a 51-49 vote. That means the competing bills of the House and Senate now go to a conference where lawmakers seek to reconcile the differences between the two approaches to cutting taxes in the US.
But it’s a material step closer to enacting the cuts President Trump has been seeking. So, the US dollar is bid as traders in early Monday Asia trade focus on the stimulus of tax cuts rather than the maelstrom of the Russia/Flynn revelations – and quite frankly the president’s weekend tweets.
Whether this US dollar strength continues, increases or proves ephemeral will depend as much on the data flow this week as anything else. As I noted earlier the question I’m wondering is whether or not it’s enough to forestall the bears who at every turn recently have come out of the woodwork to find a reason to sell US dollars.
Of course, that reason, if they want to take it, can be the Flynn/Russia investigation. All I’d say to that is US economy. It’s strong and looking more and more like with the added stimulus of tax cuts the Fed will need to increase rates four times next year. Ultimately this reality is likely to see the US dollar strengthen materially and for an extended period. The question is when.
And the question is whether the Aussie dollar can make some headway in that environment or like most folks think, the preconditions I’ve outlined for USD strength are in fact going to hammer the Aussie lower.
That’s a question for the future. But for the day and week ahead the reality is that the data flow here in Australia, the partials of GDP, the RBA governor’s statement, the GDP release itself, retail sales, and trade will all determine how the Aussie ends the week.
I’ve mentioned often recently in my musings on Forex, and we saw with the Canadian dollar Friday, it’s the local side of forex pairs, not just a USD narrative that is the key driver at the moment.
So, with Q3 growth expected to be solid at 0.8% or better and a chance to hold at a 3% annual rate, with the governor expected to be fairly upbeat, and with trade expected to show another solid surplus this might actually be a positive week for the Aussie dollar.
I know that’s out of line with all the negatives I’ve been highlighting recently. But if the data flowsthe way the RBA forecasts suggest it can then the Aussie might just find a bid.
Retail sales are going to be important too – maybe even more so than GDP – given the past three months weakness.
In other forex market developments, the US dollar is stronger this morning on the back of the passage of the Senate bill.
USDJPY looks like it has broken higher. I guess when you think about it the stronger US economy, solid bid in US equities and the mood of traders should be a positive for USDJPY. Especially after the BoJ has muddied the water a little on whether or not they are really thinking of changing their approach and letting 10’s rise a little. It’s very thin early morning trade though so we’ll see how the day plays out.
Sterling suffered a little on Brexit worries and the Aussie and Kiwi are down this morning on the back of the stronger US dollar. I have to say I am an unabashed USD bull. My sense is the economy is doing well, the Fed is acting while other central banks are talking, the stimulatory impact of tax cuts is still to be factored into Fed calculations, and of course, the result of these factors will be rising bond rates in the US. All of that is USD positive. Of course, a soft Brexit, or hopes thereof, has helped the Pound and the Aussie and Kiwi have benefitted from selling fatigue in the past week or two. But structurally as we head into 2018 the US dollar is likely to return to strength.
But before we worry about that we need to talk about the CAD’s move Friday. WOW. Toward the end of last week, I said that I’d probably be selling USDCAD again if it didn’t break up and through the recent high. That didn’t happen because of the swift move we saw on Friday after the Canadian employment data shot the lights out with a 79,500 gain in November and Canadian GDP was a small beat for Q3 at 1.7% annualised. Although that latter number is a big slowdown from the previous run rate of 4.3% the employment data and USD selling saw USDCAD collapse to the bottom of the range. It’s at 1.2698 now – up 0.13% this morning.
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