Market Analysis

Taxing Issues

US Senate are set to unveil proposals for a significant re-writing of the the US Tax Code, includingrporate taxation, on September 25.  There is every likelihood, if the tone of President Trump’s tweets are accurate, that there will be an attempt to lower the US corporate tax rate. And if that is the case, and bearing in mind how well the US dollar responded in 2005 when President Bush’s Administration brought in for one year only a greatly reduced corporate tax rate, traders may wish to stay tuned to the unfolding story. The key point to recall from the Bush Administration is that while the legislation was mooted and signed off in 2004, it was when the law became effective that lent itself to the upward move in the US dollar. It remains to be seen if there will be a similar “tradeable” event in the Trump Administration’s proposals but the numbers involved are huge. For example,  US bank Morgan Stanley estimates that “the 30 most cash-rich US corporates have USD1.2trn holdings of cash and securities. Of this USD1.2trn, USD840bln is held outside US, but is often invested into USD denominated securities such as corporate bonds.” In the US firm’s view “should tax reform talks between the White House and the Democrats gain momentum, US bond yields, including the corporate bond spreads, may be carefully watched by market participants.

Tax reform may lead to a wave of corporate bond selling currently held in offshore accounts such as Bermuda by cash rich US corporates. Higher yields would support the USD vs low yielding currencies.” And that’s aside from offshore funds held in other currencies by US corporates, funds that would have to be exchanged for US dollars prior to any repatriation. Nor does it address the issue of potentially tighter US dollar liquidity for banks operating outside the United States if greenbacks held offshore are repatriated. US tax reform will likely have a slow burning fuse, but traders should keep a watchful eye on it because any material lowering of the US corporate tax rate could, in time, have material implications for the currency markets.

Written by Neal Kimberley, External Currency Analyst.