The Bloomberg dollar index has surged, rising as much as 0.8% higher against all G-10 peers, its biggest advance since Jan. 26, and is on track for its first weekly gain since early July.
The move has been largely attributed to the “stronger-than-expected employment and wage gains”, although as several banks commented shortly after the payrolls report came out, “everything is in place for a classic short-squeeze.”
However, the real reason why the dollar is spiking today is following comments from Gary Cohn who said that he’s “confident” tax reform can be accomplished by year-end and together with House Ways and Means Committee Head Brady, underscored that another Homeland Investment Act, or HIA2, plan to repatriate offshore dollars is coming:
- *BRADY: GOVT SET TO DELIVER `PRO-GROWTH’ TAX REFORM THIS YEAR
- *BRADY: GOVT POISED TO ACT ON TAX REFORM FOR 1ST TIME IN 31 YRS
- *CHIEF GOP TAX WRITER: JOBS REPORT SHOWS TOO MANY STILL HURTING
- *REP. KEVIN BRADY: JOBS REPORT SHOWS `STEADY PROGRESS’
- *COHN: ECONOMIC GROWTH WILL HELP PAY FOR TAX REDUCTIONS
- *COHN: WE’RE WORKING FOR MAJOR TAX REDUCTIONS
- *COHN: WE ARE COMMITTED TO AS LOW A RATE AS POSSIBLE FOR COS.
As a reminder, the original Homeland Investment Act of 2004 provided for a one-time tax holiday in 2006 on the repatriation of foreign earnings by US corporations. Back then, companies repatriated €300b in 2005, 5x more than in preceding years. As a result, the DXY was up 12.2% in 2005. While the dollar was generally favored by interest rate differentials, and also some of the repatriation would have been dollars held in offshore accounts that would not have required an FX component to them, the HIA provided a significant USD bid.
As several banks, most notably Citi notes, Democrats are under pressure to support HIA while tech companies, which are major donors to the party, are one of the major beneficiaries of repatriation. There are anecdotal reports in DC of intensive lobbying of Democratic lawmakers taking place by these firms, which would suggest that even if the Fed disappointed in the next few months, HIA 2 alone could provide a much needed tailwind to the USD.
And, in an amusing tangent, so far the White House response to today’s data has been “very disciplined and professional” with Trump also sounding more polished in his WV rally last night. This has prompted various analysts to concludes that Generally Kelly is getting a grip, which is also dollar bullish.
That said, not everyone is convinced, and CIBC’s Bipan Rai saying that “today’s number is just a short-term vehicle to express intraday dollar trading rather than a shift in strategic view.” Though, he adds, the USD is due for a “corrective snap back.”