Tax Bill Set Back Kills Dollar's Rally

Nothing had a greater impact on the U.S. dollar this week than Treasury yields and political headlines.  Yields moved on the back of tax reform news and the dollar responded accordingly.  This was exactly what happened today though the greenback had started the NY trading session softer on the back of President Trump's latest comments to North Korea - "Do not underestimate us. AND DO NOT TRY US."  This keeps military action on the table but the newfound friendship between President Trump and Chinese President Xi suggests a softer approach. In an appearance with President Xi today, Trump said, "Together we have in our power to finally liberate this region and the world from this very serious nuclear menace, but it will require collective action, collective strength, and collective devotion to winning the peace." So while North Korea remains a hotspot, having hit all of the key countries (only Vietnam and the Philippines are left), President Trump is now in the tail end of his Asia tour allowing investors to shift their focus back to Washington. The House is widely expected to vote on the tax bill next week but based on today's headlines, it will meet significant resistance in the Senate.  According to Senator Bill Cassidy and GOP Senator John Thune, the House and Senate are not on the same page. The Senate plans to keep 7 tax brackets instead of the 4 proposed by the House and at different levels from what is in place today. They also want to delay the corporate tax cut to 2019 and scrap the excise tax on payments offshore.  The Senate's plan could be out as quickly as Friday and if not, sometime early next week.  Either way, the Senate plan will look different from the House plan and how different;y it reads will determine how the dollar trades. Regardless, clearing the Senate won't be quick and easy so in the near term, we could see USD/JPY slip as low as 112.15.  Friday's University of Michigan Consumer Sentiment report is not expected to have a significant impact on the dollar.

One of the best performing currencies today was the Canadian dollar, which soared on the back of U.S. dollar weakness and higher oil prices. The drama continues in Saudi Arabia with reports that King Salman will be stepping down and transferring power to his son, the Crown Prince Mohammed bin Salman. Not only have they been on an aggressive campaign to consolidate power but they've also become increasingly critical of Iran.  At the same time, they announced plans to reduce oil exports in December by more than 10 percent. With oil and Canadian yields finally moving in the same direction, USD/CAD sank to its lowest level in 2 weeks. The only piece of data from Canada was house prices, which increased slightly in the month of September. 

After starting the NY trading session higher the Australian and New Zealand dollars gave up all of their gains despite a rising U.S. dollar.  The New Zealand dollar failed to extend its post RBNZ gains while AUD/USD struggled beneath the 200-day simple moving average.  Data from Australia was weak with home loans falling sharply and investment lending contracting but inflation in China ticked slightly higher.  All 3 commodity currencies are trading near important resistance levels (77 cents for AUD/USD, 70 cents for NZD/USD and 1.26 for USD/CAD) so unless the U.S. Senate releases their tax plan on Friday and the market responds negatively, we may see a bounce in these currencies.

The euro spent most of the day in positive territory but amidst all of the intraday volatility, it did make a temporary trip back to 1.1600 before ending the day near 1.1650. Stronger than expected German trade and current account data helped to spark the initial bid in the single currency but it was the sell-off in the U.S. dollar that really cemented the rise in the euro.  Comments from European Central Bank officials were also less pessimistic with ECB member Constancio saying no decision has been made about buying more corporate bonds and member Lane adding that the bar for anther QE extension is higher.  So while they are not ready to raise interest rates anytime soon, they also have no plans to increase stimulus.  After consolidating in a very tight range over the past 3 trading days, today's pop in the EUR/USD puts the pair on track for a move to the November high of 1.1690.   The Swiss Franc also ended the day sharply higher even though Swiss National Bank President Jordan warned that they SNB is prepared to intervene in the FX markets if needed and they have room to maneuver on negative rates if the economy worsens. They see the franc as highly valued and want to the currency lower.

There was also a lot of volatility in sterling today with Brexit talks underway.  At first, investors were disappointed that no breakthroughs were made during the negotiations but later they were encouraged by Prime Minister May's willingness to pay the GBP53 billion Brexit bill the EU has been demanding.  So far it seems that EU officials are still playing hardball and until they show some willing less to work with the U.K., Brexit will be a drag on the currency.