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From the Floor: USD eyes tax reform, ZAR surges on Ramaphosa hopes

#SaxoStrats
  • US tax reform this week looks increasingly likely
  • A breach of EURUSD 1.17 could send pair lower still
  • ZAR surges, 10-yield dips on outlook to Ramaphosa win
  • South African yields would rise on surprise Dlamini-Zuma victory
  • Equities preparing for a final leg up for this year
  • Equities getting close to a peak for this cycle
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By Clare MacCarthy

As we head into the final trading week before Christmas it's looking increasingly likely that US president Donald Trump can finally include a success in his legislative record – delivery of his long-awaited tax reform package. This comes, says John J Hardy, Saxo's head of forex strategy, after one of the Republican senators opposed to the process switched sides upon the inclusion of some additional text that would limit the ill-effects of the bill. "Tax reform is making progress and there are high odds it'll be accomplished this week," Hardy says. But despite this, the euro-dollar is hovering around in the middle of its Sept./Nov. range, and perhaps heading further down should EURUSD 1.17 be breached.

Elsewhere in forex markets, Hardy reports that the South African rand is surging on the back of an anticipated victory by Cyril Ramaphosa, the reformist aspiring ANC leader, in today's party leadership selection. "If he wins this would be very good news for South Africa," Hardy says. Althea Spinozzi, of Saxo's fixed income team, agrees, saying the yield on the country's 10-year bond which hit a high of 9.4% in November and fell back to 9% as Ramaphosa gained traction "could go lower still". However, should his rival (and president Zuma's ex-wife), Nkosazana Dlamini-Zuma, win the contest, then South African yields would rise sharply.

Finally today, equities are doing well on the back of that tax reform progress in the US and the Hang Seng extended its gains during the Asian session. "We're getting ready for a final leg up in equities for this year," says Peter Garnry, Saxo's head of equity strategy. But, just like trees cannot grow into the sky, equities cannot go on rising forever. "I've been saying for some time that we're getting close to a peak for this cycle," he says, predicting that the market will turn weaker when a range of economic indicators turn softer in February/March.

 Trump's tax plan will likely become law this week. Pic: Shutterstock

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