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Can USD JPY Exchange Rate Maintain Bullish Trend on Trump Tax Cut Push?

April 25, 2017 - Written by John Cameron

News that Donald Trump is aiming to cut corporate tax from 35% to 15% in his much-anticipated tax reform package prompted the US Dollar Japanese Yen (USD JPY) exchange rate to strengthen.

Markets were encouraged by the prospect of hard plans, even though such a cut would leave a significant hole in the US budget and could face opposition in Congress.

Although April’s consumer confidence index weakened further than forecast this failed to dampen the mood towards the ‘Greenback’, with the measure still at a relatively high level.

The latest new home sales and house price index figures, meanwhile, bettered expectations to offer some cause for confidence in the strength of the domestic housing market.

Demand for the Yen, on the other hand, remained weak thanks to the ongoing relief rally that followed the results of the first round of the French presidential election.

With worries over the shifting global political landscape temporarily easing investors saw little reason to favour the safe-haven Yen at this juncture.

As the appeal of higher-yielding assets improved the USD JPY exchange rate was encouraged to make strong gains, with the Yen unlikely to find any particular cause for confidence in the near term.

Further volatility is expected for the US Dollar once the full details of the Trump administration’s tax plans are made public.

Even so, if there are signs of a greater push back from Congress over the proposals then the ‘Greenback’ may struggle to hold onto its recent bullishness.

Ongoing worries over the possibility of another US government shutdown could also put downside pressure on USD exchange rates.

As researchers at TDS noted:

‘While the 2013 episode did not significantly dent risk assets, a government shutdown this time around could be more impactful. A shutdown would serve to remind markets of the level of contention on Capitol Hill and highlight the lack of unity within the Republican Party. We suspect that a government shutdown could prove more negative for risk assets than the 2013 episode suggests, with markets likely further lowering the odds of tax reform being completed in 2017.’

Downside pressure for the ‘Greenback’ could also come on the back of March’s advance goods trade balance and durable goods orders data, with both expected to show a weakening on the month.

While investors remain largely optimistic at this juncture the outlook of the US economy is still not entirely positive, particularly as an element of political uncertainty continues to hang over investors.

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