The US dollar is up sharply this morning, thanks to the Senate passing the 2018 budget last night. The budget passed by a narrow margin (51-49), with help from senators McCain who voted 'Yes' and Cochran, who recovered from health issues in order to vote. Now that the Senate has passed the budget, Trump's upcoming tax reforms will be protected from the potential of a Democrat filibuster. While passing the budget is not a prerequisite for the tax bill, it allows tax reforms to get through with as few votes as possible. Most importantly, the tax bill will not require input from the Democrat minority. As inflation expectations rise, bond yields are rising and inflation-sensitive assets such as gold and the Japanese yen are weakening. The dollar has now fully erased its earlier losses from October 19.
USD/JPY is very strong and is now above 113. The pair is currently trading just above 113.20. EUR/USD is down this morning after rising yesterday, with the pair currently below 1.1810. The pound remains weak, with GBP/USD currently below 1.3110.
This week is a relatively light week for the US dollar. Tuesday's industrial production figures (0.3%) met estimates while export (0.8%) and import prices (0.7%) beat expectations. On Wednesday, building permits (1.215m vs. 1.25m expected) and housing starts (1.127m vs. 1.175m expected) failed to meet expectations. The Fed’s Beige Book survey suggested a hawkish outlook, with interest rate hikes now looking more likely. Initial (222k vs 240k expected) and continuing jobless claims (1.89M vs 1.9 expected) both beat expectations. Today, we’ll see existing home sales. Last week, both CPI and retail sales missed expectations, driving down expectations of Q3 growth and inflation.
After falling sharply in the second week of October, we are downgrading the US dollar to neutral. Thanks to rising doubts regarding Trump's ability to get tax reforms through Congress and strong performance in the euro and the Chinese yuan, the US dollar is broadly weakening. While the currency remains in oversold conditions in the medium-term, the dollar bull market that was intact since early September is now taking a breather.