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FX commentary [07/08/17]

News   •   Aug 07, 2017 10:16 +08

The Dollar rally had a bit to do with the July Jobs report, but it was more about repatriation pledged from White House Economic Advisor Cohn. The July jobs report was sound across all headlines, and while wage growth came in just above expectation, it remains sombre.Despite the rally, the USD dollar is by no means out of the woods, but a return to US fiscal policy headlines or a more aggressive Fed balance sheet initiative will present some serious headwinds to the weaker US dollar narrative.

Just as the market had predictably begun to fade the post NFP headline inspired dollar rally, National Economic Council director Gary Cohn repatriation comment caught the market oversold dollars, and while the correction may be temporary, it does suggest traders are taking a more balanced view of US dollar risk given the latest US fiscal headline.

Repatriation flow is nothing to sneeze at, and despite the lowest hanging fruit on the Trump economic plan, U.S. corporations have been squirrelling profits and cash abroad to avoid paying the 35 % tax stamp at home for decades.Undoubtedly multiple billions will be held in foreign currency that will need to be converted to USD. While difficult to put an exact figure on this amount it's thought to be somewhere between 250-500 billion in foreign currency. Regardless of the exact size those are some hefty numbers and will prove USD positive not only from a money inflow perspective but will also reduce the US current account deficit making US assets that more appealing to foreign investors.

However, we’ve been down this road before as traders adopt a case of once bitten twice shy at this morning open while desperately searching for reliable details on the Homeland Investment Acts tax repatriation

Much of this year's dollar sell off has been on the back of Fed rate hike uncertainty and President Trump's pro growth initiatives which have struggled to get government support. With the CME Group's FedWatch tool barely budging on the NFP, the repatriation comments were by all accounts the primary catalyst for the short dollar unwind.

The focus will shift to Fed speak as Dudley, Brainard, and Kaplan all hit the wires this week. With the market turning to Fed on hold for 2017, dealers will be looking for any change to a more aggressive balance sheet reduction narrative which could spark an extension of last weeks dollar rally.

Given typical August liquidity conditions, we could be in for a bumpy week as the market irons our if we’re in a short term USD correction or a trend reversal.