FX desks in Asia put a bid under the US dollar as the Senate's decision to approve a budget blueprint for the 2018 fiscal year has made way for the GOP to enact a tax-cut package without Democratic support. Tax cuts are widely seen as inflationary, thus the long duration treasury yields strengthened. The yield curve steepened to 80 basis points and the USD index rose to 93.50 levels. The other big news in Asia was the drop in the NZD/USD pair below 0.70 handle. Investors are unclear about the RBNZ's mandate under the new government, thus NZD is being offered across the board.
Main topics in Asia
US Senate adopts budget resolution, sets stage for tax reform
UK PM Theresa May urged EU to create 'new dynamic' in Brexit talks
A report from BBC says, "Theresa May has urged EU leaders to create a "dynamic" in Brexit talks that "enables us to move forward together", at a working dinner in Brussels."
USD/JPY clocks 2-week high of 113.19 as T-yields rise on the US tax reform news
The Dollar-Yen jumped to two-week high as the steepening of the treasury yield curve on US tax reform news boosting the demand for the greenback. Also worth noting that JPY tends to strengthen on Friday on fears of escalation of crisis in the Korean Peninsula over the weekend.
Kiwi bears eye 0.6908, 11th April low
NZD is being offered on uncertainty regarding the RBNZ's mandate under the new government.
Looking ahead
European desks may keep the USD well bid on the tax reform news. EUR and GBP are likely to feel the heat of the political uncertainty (Catalonia crisis and Brexit deadlock). GBP/USD could slide to 100-DMA level of 1.3045 on speculation that EU leaders will express concerns regarding the lack of progress in Breit negotiations.
Political uncertainty is likely to overshadow data releases in Europe - EZ PPI (Sep) and Current Account (Aug). In the North American session, CAD retail sales and US existing home sales are due. Fed's Yellen speech may not move the markets today.
EUR/USD drops 0.30 percent as the yield differential widens
The US-German 10-yr yield spread is rising on US tax reform news. Thus, EUR/USD may remain on the back foot. EZ PPI unlikely move markets, focus on European Council Meeting.
ECB: Lower for longer 2.0 - ING
The Eurozone economy has not changed since the September ECB meeting and even though the results of the German elections have somewhat dampened the eu(ro)phoria of the summer months, survey indicators still point to a continuation of the recovery well into 2018.
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