One can probably put the time of death of the Trumpflation rally as 11:47pm on Monday night. That’s when the WSJ published the latest excerpt of its Friday interview with Donald Trump, in which the president-elect himself said the dollar was already “too strong”and blamed this is in part due to China holding down its currency and added that “our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
The yuan is “dropping like a rock,” Mr. Trump said, dismissing recent Chinese actions to support it as done simply “because they don’t want us to get angry.”
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As the WSJ added, Trump broke with a recent tradition of presidents refraining from comments on the dollar’s level, and more to the market’s surprise, he is now talking the dollar down, not up. The USD is up 4% against a broad basket of currencies since he was elected, and roughly 25% since mid-2014. The dollar-negative sentiment was echoed several hours later by Trump advisor Anthony Scaramucci, who told a Davos audience that “we must be careful of a rising dollar.”
In short: the dollar’s rise may be over for the time being.
Trump didn’t only lash out at the greenback, and in the same interview, which was originally conducted on Friday but whose details were only released on monday, he slammed the Border Adjustment Tax (BAT), the “cornerstone of House Republicans’ corporate-tax plan, which they had pitched as an alternative to his proposed import tariffs” and which some have speculated could catalyze as much as a 15% move higher in the USD.
“Anytime I hear border adjustment, I don’t love it”, Trump told the WSJ, calling the Border Tax Adjustment “too complicated. “
The border adjustment measure is part of U.S. House of Representatives Speaker Paul Ryan’s “Better Way” tax reform blueprint, which was discussed with top members of the transition team during a meeting on Capitol Hill on Monday. The measure intends to boost U.S. manufacturing by taxing imports while exempting U.S. business export revenues from corporate taxation. Though some tax experts believe Trump has given his support for the border adjustment provision, he termed the measure as getting “adjusted into a bad deal” in the interview.
As warned here previously, retailers and oil refiners have likewise criticized the measure, warning it would drive up their tax bills and force them to raise prices because they rely so heavily on imported goods. But the biggest factor against the BAT may be that Koch Industries, a conglomerate run by billionaire brothers active in Republican politics, last month said the border-adjustment measure could have “devastating” long-term consequences for the economy and the American consumer.
The WSJ provided the first indication of Trump’s position on the BAT, which previously was assumed to be supported by Trump. That is no longer the case:
The apparent divide between the incoming president and congressional allies underscores the challenge Mr. Trump will face advancing his agenda, and in particular his planned tax cuts. The transition team and House leaders have been talking but they clearly have some details and agreements to work out.
“Speaker Ryan is in frequent communication with the president-elect and his team about reforming our tax code to save American jobs and keep the promises we’ve made,” said AshLee Strong, a spokeswoman for House Speaker Paul Ryan (R., Wis.) “Changing the way we tax imports and exports is a big part of that, and we’re very confident we’ll get it done.”
As the WSJ adds, on the campaign trail last year, Mr. Trump proposed lowering the corporate tax rate to 15% and in the interview with the Journal on Friday, he seemed to suggest that rate cuts were his preferred mechanism for improving the corporate tax system.
“Under the border adjustment concept, if somebody is making a motorcycle or a plane in our country, they’re getting a credit for the plane they make before they send it over to wherever it’s going,” Mr. Trump said. “And you don’t need that plus lower taxes and everything else. And it’s too complicated. They get credit on some parts and not other parts. Where was the part made? I don’t want that. I just want it nice and simple.”
Should Republicans jettison the border adjustment following Trump’s criticism, they will need some other way to prevent companies from booking their income outside the U.S., said Warren Payne, a former GOP policy aide at the Ways and Means Committee. Furthermore, unless the US finds a way to effectively tax imports, suddenly Trump’s stimulus plan looks quite expensive, putting it in jeopardy.
The result: a broad drop in the USD across all currencies overnight.
Unless Trump issued a “clarification tweet” on his position on the BAT, this may have been the official end of the Trumpflation rally.
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