Dollar boost from US tax overhaul seen as next year’s business

Currency traders are looking past the bickering between President Donald Trump and Republican senators to assess the market-moving potential of an overhaul of the US tax system. The conclusion: It would be a boon for the dollar, but not any time soon.The Bloomberg dollar index has pared its 2017 drop to about 7.3% after rebounding in the last month on speculation that some form of tax cuts will become law, spurring economic growth and encouraging American companies to repatriate overseas earnings.Not so fast, say Rusate Capital Management and UBS Wealth Management. Their view is that a revamped tax system could support the economy and the greenback, but that it’s more likely next year’s business, rather than a trigger for an immediate rally. There’s also the interplay with monetary policy to consider – some analysts give more weight to Federal Reserve decisions in coming months.With House Republicans saying their goal is to release a bill on Nov. 1, below are some themes that currency analysts and investors are focusing on as the plan takes shape.One of the administration’s key aims is to reduce the levy on US companies’ offshore profits closer to 10% from 35%, which Trump has said will cause money to come “pouring back.” Yet predictions vary for the amount of cash that Corps could repatriate from their estimated stockpile of $2.6tn stashed offshore.JPMorgan Chase & Co concludes dollar bulls may be disappointed, predicting the flow back into dollars may be around $456bn. “The reality of corporate repatriation is that the likely FX flow is much smaller than headlines suggest, and the historical impact from such flows shouldn’t be over-read,” analysts Daniel Hui and Niall O’Connor wrote in an October 6 note. The key, according to JPMorgan and other banks, is that much of the money is already in the US currency, hedged or in illiquid assets. “I don’t think that the repatriation tax change is going to have much impact at all on the dollar because a lot of the money is already held in dollars offshore,” says Robert Sinche, global strategist at Amherst Pierpont Securities.Bank of America Corp estimates inflows ranging from $250bn to $400bn. “The FX impact from any repatriation flow is a very jagged and lagged one,” John Shin, an FX strategist, said in an October 17 report. “Ultimately, we do think that a base case for a repatriation act would be a positive impact for the USD on net”. Australia & New Zealand Banking Group says it could be as little as $140bn. “If history is any guide, the effects of corporate repatriation on the USD are often dwarfed by evolving monetary policies”.The prospect of repatriation aside, tax-system changes still stand to help the dollar by leading traders to anticipate quicker economic growth and more aggressive Fed tightening.“You could have as much as 10% appreciation” next year, says David Rusate, founder of corporate advisory firm Rusate Capital. “Corporate tax reform could have a much bigger impact on the dollar because of the effect on potential inflation expectations, higher interest rates and investors seeking yield,” Rusate says.“What’s good for the dollar is anything that urges the Fed to hike rates further,” says Thomas Flury, strategist at UBS Wealth Management. “Anything that would enhance the deficit and then lead to a short-term rise in demand could lift the dollar,” he says.The Institute of International Finance sees similar “secondary effects”. “If we assume these proposals provide some boost to US growth prospects and competitiveness, it could lead to increased foreign portfolio equity and direct investment in the US – a dollar-positive event over the longer term,” the industry group writes in a report.There’s a historical precedent for evaluating the impact of any tax overhaul: the Homeland Investment Act of 2004, which went into effect during the administration of George W Bush. It provided for a one-off tax holiday on foreign earnings.“This was a positive for the dollar,” says John R Taylor, head of Taylor Global Vision. “Our analysis and models were showing us back then the direction the dollar should be going, versus different currencies, due to certain factors. And since the dollar was trading stronger than that in some cases, we felt it was the tax effect”.The Bloomberg dollar index has pared its 2017 drop to about 7.3% after rebounding in the last month on speculation that some form of tax cuts will become law, spurring economic growth and encouraging American companies to repatriate overseas earnings