US: BAT should cause USD to appreciate - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the US Tax Foundation argues that the BAT is trade neutral, suggesting that it should have no net impact on the trade balance. 

Key Quotes

“However, it comes to this conclusion with the help of adjustment in the exchange rate and national prices.  The bottom line is that the BAT will cause the USD to appreciate and/or prices in the USA, especially for imports, to rise.”

“All other things equal, a BAT makes importing less profitable, imported goods more expensive, and exporting more profitable.  If there were no exchange rate or price adjustment we would expect the trade balance to narrow and stronger demand for domestically produced goods over imports.  This would tend to cause more generalized inflation.  It might also tend to boost capital inflow as companies sought to bring production onshore.  The combination of narrowing in the trade deficit and more capital inflow would place upward pressure on the exchange rate.”

“In a flexible exchange rate regime, currency appreciation would be expected to make the bulk of the adjustment to rebalance supply and demand.  A higher exchange rate would make exports less competitive and imports cheaper, and reduce the advantage of moving production onshore, tending to offset the effects of the BAT on the trade deficit and balance of payments.”

“From our perspective, as a currency analyst, it would seem that the USA tax overall is, if nothing else, bullish for the USD.  It is perhaps somewhat surprising that the USD has not risen more in response to Trump and Republican tax overhaul plans.”

“This is especially the case since the US equity market has appeared to be more clearly and consistently lifted by the prospect of tax overhaul.  Although to be fair, global equities are higher perhaps in response to stronger global growth indicators; including the PMI data.”