FX market outlook

FX market outlook

Posted on Thursday, April 27 2017 at 8:23 am GMT+0000

Dollar lower after Trump tax plan outline disappoints; euro steady ahead of ECB.

US Treasury yields turned lower and the dollar trimmed recent gains versus the yen, helping gold recover from a two-week low.

US President Donald Trump made his tax plan announcement on Wednesday, which was viewed as lacking in detail, prompting a fall in the 10-year US Treasury yield to 2.30%, moving off a two-week high of 2.35% reached on Wednesday.

Against the yen, the dollar is lower from the near one-month high of 111.77 yen hit on Wednesday, trading just below the 111.30 level in Asia.

The yen showed little reaction after the Bank of Japan kept its policy unchanged today, as expected, and there were no big surprises in their forecasts.  The BOJ slightly cut its inflation forecast for this fiscal year and marginally upgraded its growth forecast, as expected. The Bank delivered the most optimistic assessment of the Japanese economy in nine years.

The Trump administration’s outline of the tax reform did not have as much detail as markets were hoping for, and this caused some disappointment. The centrepiece of the Trump plan revealed yesterday, was consistent with earlier leaks that the President planned a cut in corporate taxes to 15%, as well as personal tax cuts and other measures. There were no definite timelines and the question remains on how much will the Federal budget deficit rise due to the tax cuts.

The Canadian dollar and Mexican peso rebounded after Trump’s comments on NAFTA. There were reports yesterday that the Trump administration was mulling an executive order on withdrawing from the North American trade pact but the latest from the US President was that he agreed not to terminate NAFTA at this time.

USD / CAD reacted immediately to the news and traded to a low of 1.3529 in Asian today, while USD /MXN slipped to 18.9504.

The euro was steady against the dollar ahead of the scheduled European Central Bank policy meeting later today. The euro reclaimed the key $1.09 in Asia today. While no change is expected in monetary policy, all eyes will be on ECB President Mario Draghi’s press conference to see if he will give any hints on when the Bank will begin to unwind its current stimulus program.

Aside for the ECB meeting, investors will focus on economic releases, which include the Eurozone economic sentiment report, and US data on durable goods and jobless claims.