The Senate Republicans unveiled their own tax plan yesterday, following the one from the House last week. The two bills are quite similar in most issues, but some key differences remain to be resolved. For instance, although both bills would cut the corporate tax rate to 20% from 35% currently, the Senate plan would delay implementation until 2019, whereas the House version would lower it immediately. In terms of income taxes, the Senate seeks to maintain the current system of 7 tax brackets, instead of decreasing them to 4 as proposed by the House.
The dollar lost ground overall yesterday, possibly due to the potential delay in reducing the corporate tax. Nonetheless, in the grand scheme of things, this is yet another positive step towards realising a comprehensive tax overhaul, as all that remains now is for the two chambers of Congress to find common ground between their proposals. In our view, the speed with which this process has moved forth in recent weeks demonstrates that Republicans are indeed committed to achieving tax reform sooner rather than later, and perhaps as early as this year. As for the dollar, its near-term direction will probably continue to be dictated by developments on the tax front. Any further steps in the next weeks that increase the likelihood of finalising tax reform, such as material progress in the reconciliation process between the House and Senate, could help the greenback to regain more ground. On the other hand, headlines pointing to unwanted delays are likely to work against the currency.
USD/JPY traded lower yesterday, falling below the support (now turned into resistance) territory of 113.70 (R1). Nevertheless, the slide was stopped by the 113.10 (S1) barrier and then the rate rebounded somewhat. Given that the pair started to retreat after it tested several times the important territory of 114.30 (R2), we see the likelihood for the bears to remain in the driver’s seat for a while, at least in the absence of any progress on the tax front. The 114.30 (R2) zone has been acting as the upper bound of the medium-term sideways range that’s been in place since mid-March. A decisive dip below 113.10 (S1) may open the way for our next support level of 112.25 (S2). On the upside, we need to see a clear close above 114.30 (R2) before we get confident that the outlook has turned positive.
USD/JPY
Support: 113.10 (S1), 112.25 (S2), 111.70 (S3)
Resistance: 113.70 (R1), 114.30 (R2), 114.85 (R3)
AUD briefly spikes down as RBA revises forecasts lower
Overnight, the RBA released its updated statement on monetary policy, where it revised lower its longer-term inflation forecasts. Importantly, the Bank now expects core inflation to reach 2% by Q4 2019. This is a relatively pessimistic signal, and it confirms our own view that any interest rate hike in Australia is still a long way off.
The Aussie spiked a little lower on the news but quickly recovered its losses to trade relatively unchanged in the following minutes. As for the currency’s forthcoming directional wave, we think that it may be decided primarily by the wage data for Q3 we get next week, as they could play a big role in determining whether the RBA will begin to appear optimistic sometime soon.
AUD/USD edged down but was quick to recover and challenge once again the resistance line of 0.7690 (R1). The pair continues to oscillate between that barrier and the support of 0.7635 (S1), but it is also still trading within the downside channel that has been containing the price action since mid-September. As such, we still see a cautiously negative short-term outlook. A clear break below 0.7635 (S1) will confirm a forthcoming lower low on the 4-hour chart and is possible to pave the way towards our next support of 0.7570 (S2).
As for the bigger picture, following the completion of a double top on the daily chart, the pair tumbled notably. Nevertheless, the rate is still trading above the upside support line drawn from the lows of January. Therefore, as soon as the rate reaches that line, we will switch to flat, as there is the likelihood of a rebound from there.
AUD/USD
Support: 0.7635 (S1), 0.7570 (S2), 0.7535 (S3)
Resistance: 0.7690 (R1), 0.7730 (R2), 0.7770 (R3)
Today’s highlights
Norway’s CPI data for October has already been released. The headline rate declined by more than expected, but the core rate ticked up, beating its forecast for staying unchanged. The reaction in NOK was negative, but not major.
In the UK, industrial production for September is due out and expectations are for a slight acceleration. Even though that could potentially support the pound a little on the news, we maintain our view that the currency’s forthcoming direction may be decided primarily by developments in the political spectrum and specifically, whether or not the Brexit talks will move forward soon.
From the US, we get the preliminary UofM consumer sentiment index for November and the forecast is for the index to have remained unchanged.
We have only one speaker on the schedule: ECB Executive Board member Yves Mersch.
Sources: Econ Alerts and FXGiants