Senate&House tax bill clash pushes dollar lower

FX:EURUSD   Euro / U.S. Dollar
The US Senate released its soft version of tax-cut plan on Thursday featured with two stages of implementation. In particular, firms may need to wait for tax breaks till 2019 what leaves a little from anticipated stimulus boost, though less risky for government budget.

The budget committee has already approved a reform option and next week the House of Representatives will vote, which is expected to point out the Senate's unjustified caution. The development of reform can lock into a cycle where the initiatives of the Upper and Lower Chambers will be reviewed several times until they work out common decision. The more differences between the reform options, the longer markets will be kept in suspense.

Investors in the fixed income market seem to expect a more aggressive version of the reform as they hastened to sell bonds after Senate update. Yield of 10-year US sovereign debt jumped from 2,320% to 2,372% on Thursday and keeps rising on Friday. The US dollar holds moderate declines, preferring to save optimism for the next week. This week turned out to be the most unsuccessful for US currency during the last month as investors were disappointed with the news about a potential delay in tax breaks for firms.

It is noteworthy that both bills will cost the government $1.5 trillion for 10 years, so in terms of the amount of expenditures they are identical and can not cause any discord. Also, both plans want to tax $ 2.6 trillion of US profits abroad, with the Senate offering a tax rate of 12% for cash and liquid assets, and the House of Representatives - 14%. From this point of view, the version of Senate look more attractive.

Morgan Stanley called the slip of tax plan as the main reason for increasing short positions on Dollar, as against the backdrop of a global recovery the US economy needs to warrant faster growth outlook to remain attractive to investors. If this is not shown, the outflow of capital will begin in search of greater yield in foreign markets.

The uncertainty that will drag on next week will probably take the dollar even lower, before it can move into growth. Medium-term dollar selloff look quite reasonable given the current development of the tax reform situation.

Arthur Idiatulin
This analysis is provided as general market commentary and does not constitute investment advice.


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