Summary:
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Republicans come up with an idea of more tax cuts as congressional elections loom
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Japanese yen lower following the news that BoJ could raise buying of ETFs
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Australian business confidence misses expectations on a political tailspin
The US budget deficit is on track to widen quite sharply over the next couple of years but it does not seem to be an obstacle for Republicans in the House of Representatives who proposed yesterday more tax cuts in the nearest future. The idea is going to make lower individual rates permanent - notice that tax reductions implemented in December last year were approved on a temporary basis. Among Republicans’ proposals one can find the elimination of the maximum age for some retirement account contributions or letting new business write off more start-up costs. Bear in mind that these changes are undoubtedly aimed at achieving a desirable outcome in congressional elections scheduled for November (so-called midterm elections). Taking into account that tax cuts helped Republicans win last year there is nothing surprising that they are trying to resort to the same this time around. However, US tax pundits claim that these proposal are slim odds to be passed through the Congress but even as Republicans failed to enact these changes it would place them in a good position ahead of the midterm elections - if Democrats oppose to another tax system revamp it could worsen their position suggesting that they are not willing to deliver more relief to consumers and businesses. This is a possible way of thinking of Republicans and from a pure political viewpoint it could make sense. Either way, these proposals are to be put to a committee-level vote on Thursday with a House vote expected by 1 October, according to House tax committee chairman Kevin Brady. There are estimates that the new round of changes put forward by Republicans would add as much as $576 billion to the deficit even as possibly higher economic growth is taken into account. Thus, beside the never-ending tariff-related thread tax cuts and midterm elections in the US are subsequent points to keep a close eye on.
We have not had any reverberations from the above-mentioned Republicans’ proposals so far in the currency market, and actually the US dollar is trading marginally lower this morning. The sole loser is the Japanese yen being 0.3% down as of 6:53 am BST. Its underperformance is a by-product of reports from Bloomberg that the Bank of Japan could increase its ETFs purchases. This is quite contradictory remark compared to those we were offered earlier suggesting that the BoJ would even consider quitting remarkably loose monetary policy in the foreseeable future. On top of that, it is worth mentioning Japan’s Deputy Prime Minister (Taro Aso) opinion with regard to trade. He said that he does not see need for FTA with the US. He added that the dialogue with US Vice President Mike Pence will take place after trade negotiations between Japan’s Economy Minister Motegi and US Trade Representatives Lighthizer. Note that earlier Donald Trump warned that he “would have a big problem if Japan did not reach a trade deal with the US”.
The USDJPY is slowly climbing toward 111.50 which seems to be a pivotal technical point for bulls. Should this leven be finally broken, it could propel the pair up toward 113.2. Source: xStation5
Looking at the macroeconomic calendar one needs to refer to Australian soft indicators which turned out to be quite mixed. While the NAB business conditions index increased to 15 from 13 in August, the gauge of business confidence declined to 4 from 7. Note that we got a significant slump in case of profitability to 6 from 16 points in July. Sales decreased to 1 from 19 points while employment stayed unchanged at 10 points. The NAB added that the employment component still implies growth of around 23k per month over the next 6 months which in turn should be enough to see the unemployment rate declining further over the rest of 2018. The Aussie dollar trading slightly higher this morning albeit chiefly due to US dollar underperformance. Note that the last month numbers concerning business conditions as well as expectations may have distorted by a political tailspin in Australia which saw Prime Minister Malcolm Turnbull stepping down.
Technically the Aussie dollar does not look to be well positioned to experience any more long-standing rebound. The pair smashed the support placed at 0.7160 last week questioning a trend reversal in the foreseeable future. Source: xStation5
In the other news:
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New Zealand’s card spending jumped 1% in a monthly basis in August beating the consensus of a 0.5% increase and boding well for retail sales numbers in the whole quarter
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The Trump administration considers sanctions against Chinese senior officials and companies so as to punish Beijing’s detention of hundreds of thousands of ethnic Uighurs
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UK Treasury officials warned the Chancellor that unless there is a change in the law after the UK leaves the EU, the government could lose up to 7 billion GBP in VAT receipts
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North Korea’s Kim Jong-un was to offer during his first meeting with the South Korean leader in April to dismantle a nuclear weapon program within 2 years, and after the South Korean Moon’s suggestions he was to agree to do so within a year
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Nomura enumerates EM economies being at risk of a currency crisis - Sri Lanka, South Africa, Argentina, Pakistan, Egypt, Turkey and Ukraine
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Chinese stocks mixed, gold trades flat, the US 10Y yield remains subtly above 2.93% this morning
