The US dollar index gained ground against its G7 counterpart currencies this week, after the Senate Republicans in Washington approved a $4 trillion budget for 2018, pushing the Trump administration proposed tax reform plan one step closer. The chamber approved the budget resolution by a vote of 51-49, with US Senators now having to reconcile their budget resolution with a separate one passed by the House. Doing so would allow for the tax overhaul to move ahead quickly, possibly as fast as this week.
Passing a budget unlocks reconciliation, which enables the GOP to pass the Trump administrations tax reform plan, with a simple 51-vote majority in the Senate. The Senate version of the bill would allow for tax cuts to add $1.5 trillion to the deficit over a decade. In contrast, the House called for a revenue-neutral proposal. Republicans hope to pass a bill that broadly chops individual and corporate tax rates and scraps provisions like the estate tax and alternative minimum tax.
The market reaction saw global stock markets moving higher, with Japan’s Nikkei stock index hitting its longest winning streak in more than half a century. In the currency market the US dollar moved to a more-than three-month high against the Japanese Yen, hitting 113.47.
The New Zealand dollar tumbled against the US dollar, Swiss franc, Japanese yen and Australian dollar as Jacinda Ardern of the Labour Party was named New Zealand’s next Prime Minister. New Zealand stock market’s reacted with shock, as the New Zealand First and the Labour Party announced that they had formed a coalition, supported by the Greens. Investors were concerned with some of the looser fiscal policies promised by the Labour Party including their intention to issue $7 billion more in debt than the National party would have and to implement a higher minimum wage and build more affordable housing. Further worries were raised that the Reserve Bank of New Zealand may have to adopt a different policy mandate, which may undermine the strength of the kiwi dollar.
The New Zealand dollar fell below the $0.70 level against the US dollar, losing over 2%, while the AUD/NZD pair surged above the 1.1200 technical level. The AUD/NZD received a further boost after Australian jobs figures surprised on the upside, prompting many investors to ponder whether the RBA may soon start to raise interest rates.
The euro continued to look past the political crisis in Catalonia last week, with the single currency holding above the 1.1800 handle against the US dollar, and gaining ground against the Japanese Yen and the British pound. The Spanish government said Thursday it would begin the process to impose direct rule on Catalonia in an unprecedented move to crush the region’s independence bid. The euro failed to react, as the government of Prime Minister Mariano Rajoy said it would invoke Article 155 of the constitution, a provision that allows the central government to suspend the autonomy of the Catalan regional administration.
The British pound will be looking to recover lost ground this week, after slipping against the euro and the US dollar last week. Disastrous UK retail sales figures and continued deadlock in Brexit negotiations between UK and EU officials pushed the GBP/USD briefly below the 1.3100 level last week. The sterling also came under pressure from mixed wage data, which caused many investors to question whether or not the Bank of England will raise interest rates, as expected in November. The British pound faces a further test this week, as the ONS releases official third fiscal quarter gross domestic product estimates.
The main event for traders this week will be the European Central Bank interest rate decision and policy decision. The ECB President Mario Draghi is widely expected to start to unwind his large-scale assets purchasing programme started back in 2014.
Traders will also look to the Bank of Canada, as they deliver their decision on interest rates. The United States also releases third fiscal quarter gross domestic product figures, and core durable goods orders data.