The US dollar rally suffered a major setback on Friday after the Trump administration failed in its attempts to repeal and replace Obamacare – a key election pledge. Having postponed the vote on the American Health Care Act from Thursday to Friday, House Republican leaders decided to pull the bill after it emerged that there was not enough support from within the Republican Party to ensure that the legislation would pass.
The vote was viewed by the markets as the first real test for President Trump’s new administration to be able to pass major legislation through Congress. Its failure means investors now have less faith in the Republican Party being able to succeed in passing other important legislation such as tax reforms and infrastructure spending. This was reflected in financial markets today with the US dollar falling sharply at the Asian open and global equities also being hit.
The rally of the greenback and global equities since the US election was being driven by the Trumpflation trade in anticipation that the new US administration would approve a large fiscal stimulus, leading to higher growth and inflation, and as a result, a faster pace of rate increases by the Fed. However, the Trumpflation trade is now in danger of faltering as markets are becoming impatient about how soon the tax reforms will be presented and whether or not they will get approved.
The dollar was down almost 1% against the safe-haven yen in mid-European session today as traders turned bearish after the defeat of the healthcare bill. It hit a 4-month low of 110.11 yen – the lowest since mid-November, while against a basket of currencies, the dollar index stood 0.5% lower at 99.09. Stock markets also came under heavy selling pressure, with most share indices falling into negative territory, while US stock futures also point to a lower open on Wall Street today.
However, it’s too early to predict the end of the Trumpflation trade as the setback with the health legislation has given President Trump fresh impetus to press ahead with the much-talked about tax reforms. The US Treasury Secretary, Steven Mnuchin, repeated on Friday he wants to get the tax reforms through Congress by August, while President Trump said he wants to turn his attention on the tax plans.
The potential boon from the shift to overhauling the tax code is perhaps reflected in the US government bond market. The yield on ten-year US Treasury notes has yet to touch the support area of 2.30%, which it’s done three times since the post-election rally, and currently stand at 2.368%. There is a danger though that even if the tax reforms met less opposition in Congress, the size of the cuts might disappoint some investors, especially as without the planned spending cuts in health, there will be less room for big tax giveaways.