Spot values at a glance:
The US dollar and Treasury yields rallied after Senate passage of tax-cut legislation drew focus away from events in the continuing investigation into connections between Donald Trump’s aides and Russia. Asian indices were mixed with gains in Hong Kong, Shanghai and Seoul contrasting losses in Singapore, Kuala Lumpur and Tokyo.
Senate Republicans narrowly approve the most sweeping rewrite of the US tax code in 30 years, slashing the corporate tax rate and providing temporary tax-rate cuts for most Americans. The 51-49 vote, achieved only after a closed-door deal making with dissident senators, brings the GOP close to delivering a much-needed policy win for their party and President Donald Trump. Trump had promised to sign tax-cut legislation before the end of 2017.
While the plan is still subject to revision, the centrepiece of the existing legislation is a reduction in the corporate income tax rate to 20% from the current 35%, along with a provision that allows some companies to bring back hundreds of billions of dollars in foreign profits at a lower rate than they otherwise would have paid.
According to a research note by Goldman Sachs, Congress will probably pass the tax-cut legislation within the next 2 weeks, ushering reductions that will boost economic growth by an estimated 0.3 percentage point in 2018 and 2019.
A potential case of obstruction of justice against Trump may be building up. That’s according to Senator Dianne Feinstein, who was speaking in the wake of the news that former National Security Adviser Michael Flynn, fired by Trump, agreed to cooperate with prosecutors probing Russia’s involvement in the 2016 US election. Flynn pleaded guilty on Friday to lying to federal agents about conversations with Russia’s ambassador. Trump said there was “nothing to hide.”
Flynn is now cooperating with Special Counsel Robert Mueller, and as part of his plea deal he provided information related to Trump’s son-in-law and senior adviser Jared Kushner, according to two people familiar with the matter, a sign that Mueller’s probe is closing in on the president’s inner circle. Legal experts said Mueller may seek to use Flynn’s testimony to build a broader case of conspiracy or obstruction of justice.
Canadian Economic Data Boost:
GDP in September grew 0.2% month-on-month, reversing October’s 0.1% contraction and exceeding the median estimate of a 0.1% gain. On a year-on-year basis, GDP expanded 3.3%, in line with expectations, but slower than the prior increase of 3.5%. Quarterly annualized GDP grew 1.7% quarter-on-quarter, more than the 1.6% expected but down from the 2Q’s growth of 4.3%.
The unemployment rate fell sharply in November to 5.9%, from 6.3% in the previous month, one of the lowest readings ever in the past 40 years. Employers added 79,500 workers during the month, more than the expected 10,000, bringing gains over the past 12 months to nearly 400,000.
The data indicates an expected slowdown for Canada’s economy in coming quarters may be less severe than anticipated and slack in the labour market is diminishing more rapidly, raising the prospect of faster interest rate increases by the Bank of Canada.
Brexit Deadline Looms:
Euro-skeptics including members of UK Prime Minister Theresa May’s own Conservative party set out new “red lines” for the negotiations ahead of a lunch meeting she’ll have on Monday with European Commission President Jean-Claude Juncker. In two further blows, the government’s social mobility advisers quit en masse, saying May has failed to improve the lives of the poorest people in Britain, while her deputy Damian Green is facing fresh calls to resign over allegations of sexual misconduct.
The storm of trouble swirling around May’s leadership intensified just as Brexit negotiations reach their most sensitive stage. The EU set her a deadline of Monday to make a better offer on the terms of the divorce that are currently stuck – including the so-called exit bill, legal protection for the rights of EU nationals, and avoiding a new hard border between the UK and Ireland.
If she fails to persuade the other 27 EU countries that her new offer on all three issues is acceptable, May will not be allowed to begin negotiating the new free-trade deal she wants with the EU, or the transition period that businesses crave. Both sides want talks to move on from the divorce terms to this second phase focusing on future relations at a summit of European leaders on Dec. 14. Without a separation deal by the end of the year, British officials fear the talks will collapse.
Japan CPI Ticks Higher:
Japanese inflation sped up in October but price rises are still less than half the central bank’s target, despite the tightest labour market in decades. Headline CPI rose 0.2% from a month earlier, in line with expectations but slowing from September’s 0.7% increase. Core CPI gained 0.8% over the same period, matching estimates and accelerating from the prior month’s 0.7% rise.
Inflation has remained stubbornly below the target set by the BOJ. One reason is that while the labour market is tighter than it has been in decades, that hasn’t translated into a strong rise in wages, meaning households have kept a tight rein on their spending.
USDSGD continued to be capped below the 1.3500 handle for most of the past week. However a stronger US dollar Monday has driven the currency pair back towards the top end of its week-long range.
Having broken above its downward trend channel since the beginning of the year, the currency pair’s technical bias continues to remain to the upside, with the key support resign at its year-to-date low of 1.3346. The pair is expected to breach above 1.3500 and target 1.3600 over the coming 1-2 weeks.
AUDUSD continues to trade around the 0.7600 mark and seems to have halted its downward trend since September which saw the pair fall as much as 6% from peak to trough.
Bias is expected to continue to the downside, nonetheless, as Australia’s economic growth slows and its yield premium vanishes. Recent slow growth in Australia’s economy has pushed back expectations for when the RBA will raise rates, hence weighing down the Australian dollar.
A break below 0.7500 is likely to lead to a move further down to the range between 0.7100 and 0.7300.
USDCAD rebounded slightly Monday, after Friday’s 1.7% slump which saw the pair close below 1.2700. USDCAD fell on very strong economic Canadian data, fuelling speculation the central bank may raise rates faster than projected.
A decline below the 1-month low of 1.2666 will most possibly drive the pair back towards 1.2400.
USDCNH extends its sideways momentum by another week. The pair has been mostly trading within the 6.5700 – 6.6700 range since end September, and is expected to continue that trend through year-end.
The key support lies at 6.5500; a decline below it may pave the way for more downside towards the 2017-low of 6.4436.
USDJPY extended its sharp rebound Monday from the 111 handle reached last week, amid a stronger US dollar. The upward momentum is expected to carry over into this week, as the key 115 resistance looms back into target once the 113.50 mark is taken care of.
GBPUSD reached its highest in almost 2 months last Friday amid USD weakness and hopes of progress being made on Brexit. However, the pair may encounter stern resistance this week with the USD rebound over the weekend likely to cap GBPUSD gains at 1.3600.
Also, even if the UK manages to move talks with Europe on to trade regarding Brexit, the next challenge will be getting a tailor-made deal, with PM May already commenting that the UK can “do much better” than a Canada-style deal that the EU may offer. While sterling has strengthened on the hope of beginning trade discussions, there are further hurdles ahead for the currency.
A retracement back below 1.3400 is expected for the week to come.