US Dollar Grinding Lower Awaiting Tax Bill Votes
- A light economic calendar on Tuesday means the news wire - particularly headlines regarding the US tax reform bill - will be in control of price action.
- The reaction by US equity markets, US Treasuries, and the US Dollar to tax reform headlines thus far suggest investors believe the bill will be good for earnings in the short-term, but not necessarily for long-term growth.
- Retail trader sentiment continues to suggest a mix trading environment for the US Dollar this week.
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The US Congress is working in overdrive to get tax reform legislation on President Trump's desk before the end of this week, and all signs are pointing to the increasing likelihood that both the House and the Senate have their votes wrapped up by Wednesday at lunch.
As the first piece of landmark legislation during President Trump's first term coming nearly a year into his presidency, investors are taking the tax bill for what it is at face value: a massive Christmas gift for corporations. But the impact of the tax bill will vary across asset classes.
In an environment where corporate earnings growth has already been robust during 2017 - the main fuel behind US equities rallying all year long - a tax bill that promises to bolster earnings even more should carry US stocks well-through 2018.
Yet at the same time, the reaction by US Treasuries and the US Dollar is telling of investors' long-term beliefs about the impact of the tax bill. While it may be positive for corporate earnings growth in the short-term, it is not necessarily being viewed as the same force for economic growth and inflation in the long-term; the US yield curve (2s10s) set a fresh yearly low yesterday at +51.2-bps.
In sum, what we're seeing play out in recent days serves to confirm our 'rest of year forecast' laid out during the Thanksgiving holiday week, "US Assets Taking Divergent Paths: Stocks Look Healthy, the Dollar Doesn’t." Since November 22, the day that forecast was written, the US S&P 500 is up by +3.75% and the DXY Index is down by -0.47%.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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