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Week Ahead: Tax Reform Concerns Weigh On USD

Published 19/11/2017, 12:55
Updated 18/05/2020, 13:00

The past week saw a drop for the US dollar as concerns about whether and when a new US tax reform plan would make its way through Congress initially weighed on both US stocks and the dollar.

On Thursday, however, the US House of Representatives passed its Republican tax reform bill, alleviating some of the pressure on equities and, to a lesser extent, the dollar. The US Producer Price Index for October came out on Tuesday significantly higher than expected at +0.4% against a consensus forecast of +0.1%, but Wednesday’s Consumer Price Index dropped down to +0.1%, as expected. US retail sales data on Wednesday was a mixed bag, with the headline number of +0.2% beating estimates while core retail sales (excluding automobiles) came in below consensus at +0.1%. On Friday, both US building permits and housing starts for October came in higher than expected. Overall, US economic data this past week was relatively mixed. Largely driving the US dollar’s move down were concerns over tax reform and fiscal policy as well as a sharp upsurge for the euro.

The big currency move this past week, as noted, occurred in the euro, which was boosted sharply early in the week by continued improvements in economic data from the eurozone. These positive releases have helped to keep the shared currency aloft despite a European Central Bank that has shown reluctance in tightening monetary policy. The most salient news boosting the euro this past week was a better-than-expected German Q3 GDP reading of +0.8% against a prior consensus forecast of +0.6%. Additionally, Italy’s Q3 GDP was also strong at +0.5%, matching its best reading in around seven years.

The British pound climbed modestly against the US dollar in the past week but economic data from the UK was mixed. Year-over-year CPI came in slightly lower than expected at 3.0% against a prior forecast of 3.1%. UK wages rose more than expected and jobless claims were significantly lower than expected, but the UK job market showed some signs of slowing, as employment dropped by 14,000. This is the first decline since late last year and the largest decline since mid-2015. Finally, October retail sales in the UK increased by more than expected.

From Australia, the jobs report on Thursday was a disappointment. Jobs increased by only 3.7K in October against a prior consensus forecast of 17.8K. And while the unemployment rate ticked down to 5.4% from 5.5%, this drop was largely due to a decline in the labour participation rate. The Australian dollar has been falling sharply against the US dollar for the past two months, and tentatively broke down below a key support level on Friday.

Finally, the Canadian dollar has also continued its general weakening trend against the US dollar. Canadian CPI inflation data for October was released on Friday. Although the CPI came out as expected at +0.1%, it was lower than the previous month and generally showed a trend of lagging inflation. The Canadian dollar has been pressured in recent months as the Bank of Canada has become increasingly dovish and recent economic data has been relatively weak. Like the Australian dollar, the Canadian dollar has generally been falling against the US dollar in the past two months, resulting in a clear short-term uptrend for USD/CAD.

The week ahead will be slower in terms of economic data than the past week. Contributing to this slowdown will be the major Thanksgiving holiday in the U.S. Aside from speeches by heads of key central banks, including the European Central Bank, Reserve Bank of Australia, Federal Reserve, and Swiss National Bank, the week will be dominated by the release of minutes from several central bank meetings. These minutes will be from the RBA, Fed, and ECB. Also included in the week’s schedule will be US durable goods orders, New Zealand retail sales, eurozone services and manufacturing PMI data, UK GDP, and Canadian retail sales.

Here are some of the key events scheduled:

Monday, November 20:

European Central Bank’s Draghi Speech

Tuesday, November 21:

Reserve Bank of Australia Monetary Policy Meeting Minutes

Reserve Bank of Australia’s Lowe Speech

US Federal Reserve’s Yellen Speech

Wednesday, November 22:

US Durable Goods Orders andCore Durable Goods Orders(M/M)

US Weekly Unemployment Claims

US FOMC Meeting Minutes

Thursday, November 23:

New Zealand Retail Sales and Core Retail Sales (Q/Q)

French Flash Manufacturing PMI

French Flash Services PMI

German Flash Manufacturing PMI

German Flash Services PMI

Eurozone Flash Manufacturing PMI

Eurozone Flash Services PMI

UK Second Estimate GDP (Q/Q)

European Central Bank Monetary Policy Meeting Accounts

Canada Retail Sales andCore Retail Sales(M/M)

Swiss National Bank’s Jordan Speech

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