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US Dollar May Fall as Yen Gains if Senate Tax Plan Underwhelms

US Dollar May Fall as Yen Gains if Senate Tax Plan Underwhelms

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Yen gains as Japanese share prices pull back from multi-year peak
  • US Dollar gently lower as prices correct after yesterday’s advance
  • Fading US tax cut prospects might amplify overnight trade patterns

The Yen narrowly outperformed in otherwise quiet Asia Pacific trade as Japanese stocks declined, offering a lift to the perennially anti-risk currency. The benchmark Nikkei 225 stock index pulled back after closing at the strongest level since 1992 on Tuesday. The US Dollar corrected gently lower against the G10 FX majors following yesterday’s broad-based recovery.

From here, the absence of anything particularly noteworthy on the data docket from Europe and North America seems likely to keep speculation about US tax prospects front and center. A plan emerging from the House of Representatives last week looks to be a nonstarter in its existing form, with traders now anxiously waiting for the Senate version to see if something may yet get passed before year-end.

The outlook isn’t hopeful thus far. Senate Finance Committee chairman Orrin Hatch said a proposal will be unveiled on Thursday. That was contradicted by Senate Majority Leader Mitch McConnell, who fingered Friday as the fateful day only to have his spokesman walk the comment back shortly thereafter. On balance this seems to hint at a lack of consensus at the highest levels of the drafting process.

Those tidbits that have emerged from negotiations have been underwhelming. Perhaps most worrying was a proposed delay of corporate tax cuts – the most exciting bit for financial markets given its implications for overall risk sentiment as well as Fed rate hike prospects – until 2019. The greenback might face selling pressure while the Yen gains amid fading risk appetite if similarly-themed sentiments proliferate.

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Asia Session

US Dollar May Fall as Yen Gains if Senate Tax Plan Underwhelms

European Session

US Dollar May Fall as Yen Gains if Senate Tax Plan Underwhelms

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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