Risk sentiment hangs on tax plan, with USD gaining in anticipation

EUR pulls back below 1.0900 as hawkish ‘source’ story fades. GBP stays strong. CAD weakness tamed late in the day as Oil recovers post EIA.

So we have some news on the tax plan; Corporation tax is to be reduced to 15% - as confirmed by Treasury Sec Mnuchin this afternoon.  Recent USD/JPY gains have been in anticipation of a major announcement on the tax plans today, and with another press conference due at 13.30 EST, expectations will be riding high, but Wall Street opened flat today as more details on the ‘biggest tax cut in US history’ is outlined.  How all this will be paid for will naturally be questioned, but with a large degree of moderation in the USD seen already, how much more can scepticism hurt the greenback from here?

Technically, we note some resistance ahead of 112.00 in the key JPY rate, but a concerted push through here may well put 115.00 back on the map; 113.00-113.50 initially.

Little follow-through seen in USD/CHF however, but this is down to significant EUR based flow seen ahead of the ECB meeting tomorrow.  While ‘sources’ have suggested the Macron victory on the weekend (easing political tensions in France) may prompt the governing council to tweak their policy rhetoric, the obvious point to make is that the En Marche candidate has won nothing yet, no matter what the polls say.  Secondly, president Draghi has categorically stated that it is still too early to consider altering its monetary policy stance, and will likely pointing to further reassessments further down the line.

This looks to have played to some degree in the pullback in the EUR rates, with spot having retreated back under 1.0900 after surviving a test on the 1.0950 level higher up.  1.0950, 1.0970 and 1.1000 are all levels which will provide obstacles on the way up, but on the downside, a series of higher lows also suggest calls for parity are fading fast.

EUR/CHF has been holding up well during the week’s leading up to the first round vote in France, and in the aftermath has adjusted above the 1.0800 market, which will a welcome relief to the SNB.  We expect there will have been some central bank operations conducted in and around the 1.0700 level up until last Friday, but this is down to the price action seen in the charts as well as the latest sight deposit data. 

In contrast, EUR/GBP has been struggling above the 0.8500 level, and this despite the period into month end traditionally providing supply out of Europe.  We have another 2 days left, but notable has been the strong demand seen in Cable ahead of 1.2750, which now looks to have shifted to 1.2800+ as longer term demand has picked up.  We still feel it is a little too early to get bullish on the UK prospects in the EU negotiations ahead, but despite mixed signals from a Conservative majority – which is being widely assumed post 8 June (general election) – dip buyers seem to be unrelenting in restoring fair value levels.  Net positioning also remains heavily skewed to the downside, and this also plays into the hands of short or longer term GBP bulls.

AUD pressure in the wake of the inflation data overnight may have been a little premature given the trimmed mean CPI rate came in as expected.  The headline miss will have encouraged the test on AUD/USD stops through 0.7500, but lower down we point to further support ahead of 0.7450 and 0.7400, while Copper prices are also holding up to provide a further positive backdrop. Nothing in the data release earlier today suggested the RBA are set to change their policy stance any time soon. 

We also noted stops through 0.6900 in NZD/USD, and we perhaps have little more reason to target lower levels here given the potential impact on dairy produce tariffs as alluded to by the US Commerce Dept this week.  AUD/NZD may have faltered a little due to the above price action, but we noted very strong demand in the mid 1.0600’s last week, with the technical picture suggesting a retest of 1.1000 higher up.

Having mentioned the dairy tariffs above, we highlight the weak CAD backdrop in the wake of the trade spat between the US and Canadian lumber producers. This has led to a USD/CAD spike through 1.3600 initially, but with Oil prices stabilising, local names suggest the CAD is oversold and correlation traders are likely to agree.  The EIA report late in the day also saw a much larger than expected draw down in Crude inventories, pushing WTI higher again – testing USD50.00 again at the time of writing.