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.
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Hello. Just Something I read in a swiss newspapers:
“Apple will pay 38 billion dollars on profits earned abroad because of the US tax reform and promises to invest heavily in the next few years in the United States, which did not fail to greet President Trump.
“Apple is a success story as it only happens in America. Our support for the US economy is a long story and we are proud to strengthen it, “said group boss Tim Cook, quoted in a group statement, which also calls for the creation of a new” campus “. “.
First announcement, the company “plans to pay a repatriation tax of about $ 38 billion as required by recent changes” in legislation, says the California-based group.”
“The tax reform, passed just before Christmas, offers for a limited period of time for American companies the possibility of repatriating profits made abroad at rates varying between 8% and 15.5%. The tax, which is due only once and can be paid over several years, should bring at least $ 220 billion to the federal state. Subtlety nevertheless, this tax applies even if the profits are not really repatriated to the United States …
Previously, profits were totally exempt from taxation as long as they remained “parked” abroad and were taxed at 35% if they were “repatriated” to the United States. Suddenly, some big companies have accumulated a “treasure war” sometimes gigantic –celui Apple being estimated at about 250 billion dollars – which fuels the greed of many countries. A payment of some 38 billion dollars “would be the largest of this type ever made,” said Wednesday the company, which claims to be already the first US taxpayer.
Other companies have made similar announcements in recent days, such as Citigroup Bank, which announced $ 22 billion in exceptional charges on Tuesday.”
Planet Money has an episode about that where they talk about how a lot of the foreign profits are actually held in US banks in the US which I presume would be in USD. So a lot of it is mostly accounting tricks.
What I am having a more difficult time to understand is how the interest rate differential is (and expectations around it) not having a downward effect on eurusd? I understand that in early mid 2000s the rate hike cycle didn’t seem to increase the strength of the USD either. Is it just that markets have completely discounted all rate hikes over the project horizon (year? two years?) and the change in prices is dictated more by changing policy rather than rate differentials? I am trying to figure this stuff out.
On another note, what about the Fed normalizing the balance sheet. Would that be generally USD positive? As I understand it (please correct me if I am wrong) this should decrease USD supply as securities come to maturity?
You’re exactly right with accounting tricks, and that most firms would be holding dollars too.
On rates, we really only trade the expectation of rate moves, rather than the moves themselves. We’ve been blessed with big trends because of the years of extraordinary mon pol. Usually rates are moving in response to normal ebb and flows in economies rather than the banking system blowing up ;-}