FX market outlook

Dollar surges on Trump’s tax proposals; kiwi down after RBNZ releases monetary statement

In a data-quiet session, the dollar managed to extend yesterday’s gains in Asia after the US President, Donald Trump, revealed his plans on tax reforms a day before. Meanwhile, markets were scanning the RBNZ statement released after the central bank decided to hold rates steady, with the kiwi dipping into losses after the new RBNZ Governor signaled that a weaker currency was needed.

Trump unveiled late on Wednesday in Indianapolis the tax plan outline prepared by White House members and his Republican counterparts that is dubbed as the biggest US tax reform in three decades. The plan aims to reduce corporate and small-business income taxes as well as to cut taxes on high-income earners, with Trump saying that he would not negotiate the Republicans proposal to lower corporate taxes to 20%. However, details on how these tax cuts would be funded were lacking, with markets concerned that the tax proposals, if turned into law, would add to the nation’s $20 trillion debt. Though, Congress will only debate the plan when it decides on the 2018 fiscal budget, probably in October.

The dollar index touched a fresh 5-week high of 93.46 as markets were more optimistic of fiscal stimulus to be delivered in the US. Euro/dollar edged down to 1.1733, while pound/dollar fell by 0.12% on the day to 1.3368 ahead of the BOE Governor Mark Carney’s speech later today.

In Tokyo, the Parliament announced the dissolution of the lower house on Thursday as the Japanese Prime Minister, Shinzo Abe, called for a snap election on October 22.

Dollar/yen jumped by 0.20% to 113.03.

With political uncertainties remaining in the background, the kiwi weakened in Asia after the RBNZ talked down the currency and decreased its growth rate forecasts following its decision to keep rates unchanged at a record low of 1.75%. The RBNZ Acting Governor, Grant Spencer, who replaced the previous Governor Graeme Wheler whose five-year term ended, said in his statement that “a lower New Zealand dollar would help to increase tradeable inflation and deliver a more balanced growth”, while he also supported that “monetary policy will remain accommodative for a considerable period”.

The kiwi fell from $0.7232 prior the statement to a session low of $0.7170, before climbing to $0.7189. Its Australian cousin touched a six-week low of $0.7804, weighed mainly by the stronger dollar.

The BOC Governor, Stephen Poloz, dampened hopes for another rate hike on Wednesday, saying that there is “no predetermined path for rate hikes from here”. Consequently, the loonie fell sharply by 1%, with dollar/loonie rising to a one-month high of 1.2504.

Regarding commodities, oil prices were down during the session while gold was moving sideways, trading at $1,280.50 per ounce. WTI crude declined by 0.44% to $51.91 per barrel and Brent sank by 0.66% to $57.52.