Comments from Republicans and other developments makes it seem that Trump’s tax cuts are more likely to become law by the end of the year driving yields higher with dollar strength. Senior republicans are now calling the tax cut plan revenue neutral stating increased growth as the justification, this in turn could ensure that Democrat support is not required in finally passing the bill. The bigger picture remains that US fiscal deficit increased to 3.5% from 3.2% last year and is likely to increase further in the coming year. My thoughts would be that till the time tax cuts don’t become a reality we would see USD strength but once the uncertainty is over markets will focus on the higher deficit and would search for impact on growth driving USD lower. This week US durable goods and US GDP will be the key data to watch along with the all important ECB.
USDINR 1m NDF is trading 2.5p left while EM currencies have depreciated along with moderate dollar strength. Nifty which was up 0.6% has given up most of its gains. Although the local concerns of slowdown and fiscal slippage is no more on focus, overall USD strength can still keep USDINR well bid. CMP 65.07, Range 65.04-65.20.
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