Here’s why FX traders thinking is wrong on US repatriation flows
Some of us ForexFlow-ers have been chatting about the US repatriation trade and how much it would (or would not) mean in terms of FX moves. The basic thinking around the FX world is that US companies will be flogging back to the States and bringing all their foreign currency with them and changing it back into USD dollars. The general consensus here at FFL is that that is complete hogwash.
There’s several trains of thoughts here.
- Firms don’t need to switch physical cash for their financial accounts as they used to. It’s easier than ever to hold multiple currencies around the globe but even then, the majority of the world still revolves around US dollars
- US firms aren’t patriotic, they’re after a fast buck, so they’d only repat if they could make money out of it
- Firms will only likely return to the US to increase business if it’s cheaper to operate there than in other locations (obvious) but fresh-investment would likely wipe out the gains from lower taxes, at least in the short-term
- What’s to stop Trump and the Republicans getting the boot at the next election and the Democrats subverting many of the tax changes?
On that last point, K-Man sums it up best with a cracking line;
The companies are clever enough and have an army of advisors telling them Dems will tax it again after the next elections. They can bring it back get a tax relief, pay silly dividends, put stockmarket up another 30% over DT’s term, then take it out in one go again..
In another era we would have called it “money laundering”. Today it’s called a “Tax Plan “
Si had this to say;
If you hold safe US assets abroad that are protected against your balance sheet and those assets are protecting you against a recession or even another crash. You would think twice about taking that safety away. You would want guarantees. Trump guarantees nothing with this plan and that is why investors are not flocking to back it except in a limited way
It seems we’re not alone as the latest weekly Forex report from Morgan Stanley also touches on the subject;
US tax repatriation is not a USD flow. The majority of US corporates’ offshore cash and marketable securities holdings are already held in USD (95%), so any repatriation-related headlines should directly impact the bond market but not the FX market. If assets held abroad are sold and then brought to the US, then some of that cash goes to the government as taxes and the rest may be used for investment. Investment opportunities in the US could be inflationary but that needs to materialise for the USD to rally. If the investment is done in emerging markets, then the boost to growth there would add to the long term USD bear trend, in our opinion.
As always, the stand out for me over all this tax and repatriation business is the price action in the dollar. The simple fact is that the buck today is far lower than when all this came to pass, and that’s not a sign that firms are rushing to change their foreign currency holdings into USD. That might have caught a few front-runners on the hop and that lack of buying is one reason why the buck is lower. If there are intentions to repat, then these moves are just giving better rates for that anyway.
The long and short of it is that the repatriation talk is very unlikely to evolve into big moves in the dollar. If firms are going to do it, and do big amounts, then it will be like all their other business, they won’t do it in one big trade, they’ll scale it in, maybe use options, and spread it out. The FX effect will be no different to what happens in big M&A deals we hear about. We get a headline, we see some front running for 5 minutes, and then it’s back to trading whatever the theme was before the news. That’s the reason we worship price action because that’s our only really truthful guide to what’s going on. The rest is just noise.