One potential source of dollar strength unrelated to monetary policy in the yearahead relates to potential changes in US corporate tax laws to encourage repatriation of cash trapped in offshore subsidiaries.
While much of the cash held by US corporates overseas is believed to be already denominated in USD, or hedged back into USD, if even a small fraction of the USD 2trn plus in overseas cash needs to be converted, the FX market impact could be significant. Indeed, a tax holiday in 2005, which resulted in repatriation, appeared to provide significant temporary support for the USD, though the USD also benefitted from rising US yields at that time.
While we do see potential for tax-change-driven repatriation flows to support the USD in 2018, and anticipation of these flows could boost the USD in late 2017 after legislation passes, we have not explicitly factored this into our forecasts for three reasons:
1) The process of agreeing and legislating corporate tax reform will be drawn out and complex and provisions affecting overseas cash may or may not survive in the final product.
2) While many market participants have focused on the 2005 tax holiday as a precedent for USD gains being driven by repatriation, the discussion now is about a permanent change to the tax code that would eliminate the incentive for US corporates to maintain cash deposits offshore going forward. Resulting repatriation could occur over a much longer time period.
3) Perhaps most importantly, as noted previously, our forecasts already assume the USD will run up against valuation constraints in 2017. While anticipation of repatriation flows might be a supportive factor (if legislation passes), USD gains beyond our forecast targets might diminish other sources of expected support; for example, curtailing Fed tightening plans or hastening hawkish adjustments from the ECB or BOJ.
Copyright © 2016 BNP Paribas™, eFXnews™Original Article
