As the world's 'Big 4' central bankers share a stage in Frankfurt this week, the theme of synchronised global monetary normalisation may be apparent. This could add to the US dollar's troubles, with waning tax reform sentiment, NAFTA renegotiations and subdued US inflation data also headwinds this week.
The Great Monetary Convergence looks to be in motion with synchronised global growth set to continue in 2018 – and this is broadly negative for the US dollar. Whether it is a matter of coincidence – or behind closed doors coordination – major central banks look to be simultaneously taking steps to normalise monetary policy. We prefer to think that synchronised global growth underpins the logic for synchronised monetary normalisation; we may well see such references when the world’s ‘Big 4’ central bankers (Draghi, Carney, Yellen & Kuroda) share a stage in Frankfurt this week.
Greater synchronisation in global yields – at both the short and long-end – makes for relatively boring G10 FX markets. Global bond markets have been showing signs of greater comovement since the 'Sintra pact' - when major central banks appeared to simultaneously turn more hawkish (see chart below). In this environment, policy divergence trades will be harder to come by – and investors may have to extract relative value by asking questions like who will be first to hike out of the RBA or RBNZ and Riksbank or Norges Bank. One thing's for sure: the USD will be the biggest loser from the Great Monetary Convergence given that the room for further normalisation is greater in countries outside of the US.
Odds of a successfully implemented US Tax Cuts and Jobs Act (TCJA) still remain trivial as there isn't enough political buy-in and the Senate math doesn’t add up. While the House may vote through their version of a Tax Bill this week ahead of the week-long Thanksgiving recess on Friday, the real political test is in the Senate – where the narrow (52-48) majority makes it pretty difficult to pass a bill that has clear winners and losers. It's not just the fiscal hawks that we're concerned about – note that the Senate has stricter budget procedural rules, which the current version of the Senate's TCJA does not meet. But it's also the GOP moderates that may take issue with the regressive nature of the package – especially wholesale spending cuts to fund corporate tax breaks. Add to this a (hidden) export subsidy on intangible income in the Senate's bill - which would be explicitly against WTO rules - and we could see the wheels continue to fall off this week when it comes to US tax reforms.