The US Treasury Secretary, Steven Mnuchin, yesterday announced the much-anticipated details on one of President Trump’s main election campaign pledges to cut taxes for businesses and individuals. Dubbed by Mnuchin as “one of the biggest tax cuts in history”, the tax plan provided few surprises as much of the details had already been circulating in the media in the prior days. | The main highlights of the tax plan are simplifying income tax by cutting the number of tax brackets from seven to three, cutting the corporate tax rate from 35% to 15%, and a new lower rate of the repatriation tax, which is still being worked out. Other measures include repealing inheritance taxes on estates and adopting a system of “territorial” corporate tax where overseas earnings of US companies would be exempt from federal tax. | Mnuchin is aiming to raise US GDP growth to 3% with the tax reforms. But the size of the cuts failed to impress the markets as traders remained sceptical about whether Congress would agree to all the points, especially as the Trump administration offered little in terms of measures to offset the loss in revenue from the reduced tax rates. The US dollar retreated from a two-week high of 111.77 yen prior to the announcement to as low as 110.86 afterwards, before recovering back above the 111 level. The yield on 10-year Treasury notes also pulled back, falling from yesterday’s two-week high of 2.35% to trade around 2.31% today. | Most market participants are unlikely to place fresh bets in anticipation of a big fiscal stimulus until the tax plan has been scrutinized by lawmakers and a consensus has been reached. The Trump administration appears to have already acknowledged that much of the proposals may not get approved in their current form with a joint statement from senior Republicans saying the principles outlined in the tax plan “will serve as critical guideposts for Congress and the administration”. | But it’s not just disappointment with the tax reforms that is weighing on the dollar. The possibility of the US withdrawing from the North American Free Trade Agreement (NAFTA) is also hurting the greenback. On Wednesday, White House officials disclosed that President Trump and his advisors were considering a draft executive order for withdrawing from NAFTA. The news sent the Canadian dollar and Mexican peso plummeting against the US currency as both Canada and Mexico are highly dependent on trade with the US. However, following a telephone conversation with the Canadian and Mexican leaders, Trump issued a statement saying the US will not be terminating NAFTA “at this time”. | The focus now moves to the renegotiation of NAFTA between the three nations, which is expected to start in August. Tensions have already risen after the US government announced it is imposing temporary import duties on Canadian softwood lumber due to unfair subsidies being granted to Canadian producers. | In the meantime, the Trump administration is facing the prospect of a government shutdown as Congress strives to reach a deal on a new spending bill before Friday’s deadline. The President has already had to concede funding for the construction of the wall between the US and Mexican border during the fiscal year ending September 30 as part of the negotiations to get an agreement with the Democrats. | As the US President nears his 100th day in office on April 29, Trump has signed the most number of executive orders since the Second World War but has failed to pass a single major legislation through Congress. After the dramatic failure of the healthcare bill, the Republicans are hard at work to amend the legislation and are hoping to put it to vote in early May. If passed the second time round, it may offer some hope to investors that the tax plan will have a smoother journey in Congress. 

Source - XM