Dollar Softer on Muted Market Reaction to Tax Bill Passage

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  • In the US, both the House and Senate approved its version of the tax reform bill 
  • During the North American session, the US reports November existing home sales 
  • The Riksbank kept policy unchanged but announced an end to its bond purchase program 
  • BOT kept rates steady, as expected 

The dollar is mostly weaker against the majors after the US Congress passed the tax bill. The Scandies are outperforming, while Swissie and yen are underperforming. EM currencies are mostly firmer. KRW and CNY are outperforming, while THB and RON are underperforming. MSCI Asia Pacific was up 0.1%, with the Nikkei rising 0.1%. MSCI EM is flat on the day, with the Shanghai Composite falling 0.3%. Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a higher open. The 10-year US yield is down 1 bp at 2.45%. Commodity prices are mostly higher, with WTI oil up 0.3%, copper up 0.5%, and gold up 0.3%.

In the US, both the House and Senate approved its version of the tax reform bill. The Senate passed it 51-48 just after midnight. Due to procedural issues, the House must return to the House for one final vote today but that’s a foregone conclusion. Passage has been widely expected for days, and so the market reaction today has been largely muted.

With the package coming in pretty much as expected, the main question is how this bill will impact the midterm 2018 elections. Polls show widespread skepticism over the benefits of the bill for the middle class. Politicians from both sides of the aisle will be watching these polls closely as 2018 gets under way and the jockeying picks up ahead of the November vote.

During the North American session, the US reports November existing home sales. A gain of 0.9% m/m is expected. Yesterday, the market got an upside surprise in November housing starts and building permits. Canada also reports October wholesale trade sales.

The Riksbank kept policy unchanged, as expected. However, it was less dovish than expected in announcing the end of its bond purchases. The bank added that it would continue to reinvest the proceeds of its existing bond portfolio from January 2018 to mid-2019, and noted that this means its bond holdings will still expand during this period. The Riksbank kept its expected rate path unchanged, signaling an intent to begin hiking in mid-2018.

The upside CPI surprise in November and strong growth clearly gave the Riksbank confidence to end bond purchases. So too did the soft krona, which recently traded above 10 vs. the euro. EUR/SEK sank on the decision, but has barely retraced 25% of its rise in Q4. Minimal retracement target comes in near 9.8350, followed by the 50% level near 9.7740.

New Zealand reported November trade data overnight. The deficit was -NZD1.2 bln, over twice as big as the -NZD550 mln that was expected. Exports were slightly stronger than expected, but imports rose even more. The Q3 current account gap was also larger than expected at -NZD4.7 bln, or -2.6% of GDP. Kiwi traded as low as .6955 after the data but found a slight bid. However, it was unable to break back above the .7000 area and is trading heavy.

Malaysia November CPI rose 3.4% y/y, as expected and down from 3.7% in October. Bank Negara does not have an explicit inflation target. However, falling inflation should allow it to remain on hold for now. Next policy meeting is January 25, no change is expected.

Bank of Thailand kept rates steady at 1.5%, as expected. However, it boosted its growth forecasts for 2017 and 2018 slightly. It sees inflation at 0.7% this year and 1.1% next year, however. CPI rose 1.0% y/y in November, shy of the 2.5% target and right at the bottom of the 1-4% target range. We believe BOT will remain on hold until well into 2018.