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US slides on possible tax hikes | MTFX Currency Update

USD: News of a possible doubling of the capital gains tax for Americans earning over $1 million per annum briefly hit US equities yesterday. Tax hikes were always part of the Democrat election run, although it seems they might be introduced a little earlier than most had expected. Of course, any tax hikes may well be watered down through Congress - especially at a time when US policymakers are trying to re-employ 9mn or so of their residents. The FX implications of this would seem to be dollar negative. A slightly tighter fiscal policy could encourage the Fed to keep monetary policy a little looser for longer and arguably further deflates fears of another tantrum in the bond market. Today, we have some April US Markit PMIs released and also March New Home Sales.

CAD: A highly volatile sessions this pat week has seen the CAD round out the week in much better shape. The Bank’s decision to trim asset purchases was as expected; the more constructive outlook and messaging on closing the output gap sooner than previously indicated was not. The Bank appears to be heading for the stimulus exit well ahead of the Fed and its other central bank peers, suggesting that the CAD should trade in a broadly firmer manner. Canadian term yields have picked up again, driving 2Y spreads back towards the levels prevailing in March when the CAD peaked around 1.2365. We think a push back to the 1.24 area is certainly within reach for USDCAD in the near term and we continue to forecast a drop to 1.23 later this year. The risk of a brief, downside overshoot to the 1.20 area remains, however—and has perhaps risen in the wake of BoC developments. We expect the USD to remain well-offered on modest gains for now.

EUR: The EUR really should be trading higher. It has been a good week for the EUR with most countries showing improving confidence and a more upbeat outlook. This could be emphasized today with a robust set of flash April PMIs for the Eurozone, Germany and France. Those could be enough to send EUR/USD back to the 1.2080/2100 area. Yesterday's ECB meeting had little bearing on the EUR, and the main event will occur in June when new forecasts are released, and the ECB has to handle the debate over whether to slow the above-average weekly PEPP purchases.

GBP: Much better than expected March UK retail sales have just been released and position the UK and GBP well for a strong 2Q.  We think GBP strength is better played out against the dollar over coming months with the pair returning to 1.40.

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