Muted USD Reaction To Tax Reform

Its been a roller coaster of despondency given how the failing dollar continues to trade post-tax reform headlines.

The FX markets remain tacitly focused on US inflation which suggests a tax reform victory in the Senate may continue to have a muted dollar reaction as subdued inflation could ultimately weigh on US yields.

If the market continues to underprice anything around tax reform, it’s the possible repatriation flow effects. But as it sits today, so far the euro appears to be the more active driver in overall G-10 sentiment.

The Euro

With Traders taking cues from the EU economic data and the euro reaffirming it’s strength on robust data flow, the greenback may be hard pressed to make any headway against the single currency unit as asset managers continue to flood into the euro. Ultimately the euro could be the USD’s biggest foil.

The Japanese Yen

The USDJPY should benefit from higher risk appeal and favorable US interest rate differentials. But despite what suggests a smooth path higher, traders are not banking on clear sailing to 114.00 especially after the USD’s spontaneous combustion on Friday’s Russiagate headlines.

The British Pound

Brexit will be the primary focus this week which makes positioning risk for sterling a bit testy. But with negations apparently heading in the right direction, it's difficult not to remain constructive near-term.

FX Asia

The Malaysian Ringgit

After the recent rally, positive ringgit momentum early in the week will be hard to come by given the emotional roller coaster G-10 traders are riding. This gnawing level of uncertainty should filter through to local EM sentiment.

Oil prices should continue to support the ringgit as OPEC optimism should underpin prices. But the oil patch will remain susceptible to US inventory data and shale oil production

Overall, however, the market remains positive on the ringitt on the global growth narrative providing a boon to domestic exports.

Also, the market will continue to bake in a January interest rate hike as the BNM leans hawkish. But subject to inflation and economic expansion, both of which may surpass the BNM 2018 forecasts, the market may start to price in another hike for Q3. Mind you, this will be entirely data dependent so we could see the ringgit express more volatility around critical domestic data prints.

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