USD: A tax bill fuelled corrective move higher amid a declining cyclical trend - ING
It is a quiet day in the US ahead of tomorrow’s jobs report, although the fallout – and confusion – from the proposed Tax Cuts & Jobs Act continues, points out Viraj Patel, Research Analyst at ING.
“The time-line remains to get a bill on the President’s desk by the end of the year (though we note Congress are also trying to prevent a US government shutdown at the same time). But bar the obvious political hurdles that still need to be cleared in getting the proposed tax bill over the line, there are three reasons for why we're not calling for the start of another dollar bull cycle in 2018:
- The economics for a stronger dollar doesn't add up. Without genuine supply-side reforms, the Trump tax bill is adding to the fiscal deficit without changing the long-run trend growth in the US. That is textbook dollar negative.
- The politics for a stronger dollar doesn't add up. It's clear that the President does not want a stronger dollar – the administration’s protectionist concerns remain a simmering risk for 2018. Also since the 1980s – we note the dollar tends to suffer from ‘second season syndrome’ under Republican Presidents – that is the trade-weighted dollar on average weakens in the second year of their presidency. This could well be due to the (implicitly) less $ friendly policy of prior Republican administrations, as well as mid-term election effects.
- But most importantly, the rest of the world is growing – and catching up to a US economy that is far later in its cycle. If investors are looking for goldilocks growth opportunities, then the US is probably not the first place they'll be wanting to put capital to work. This growth differential effect is quite key for the dollar – we estimate for every 1 ppt growth outperformance in the rest of the world, the trade-weighted dollar falls by 3-5%.”
“The only channel through which we may get any USD upside is the repatriation of overseas profits (and potential second-round capital inflow effects of higher US equity markets). But in the absence of an actual window for when these flows can come back to the US - the effect may be so spread out and muted over time, that one might not even notice it. Admittedly, we need the details of the final bill to conclude the overall effects, but for now – we remain firmly in the camp where US tax ‘reforms’ will not be a game-changer for a weakening $.”