Politics Put Wind in the USD Sails

Signs of compromise on tax reform from the White House could add an unexpected spring to the dollar's step. The Swiss franc was the best performer on Tuesday while the Aussie lagged. A series of second-tier releases are unlikely to garner attention ahead of US GDP and the Fed.

The US dollar finally found its legs on Tuesday after a week of struggles. One of the catalysts was a surprise proposal from Obama for corporate tax reform in exchange for one-time jobs boosting programs. The proposal would drop efforts at individual tax reform but more importantly, it's a surprisingly large first step toward a compromise that would end the sequester, spur the US economy and boost the dollar.

The dollar rally came despite some slightly soft economic data. American consumer confidence was at 80.3 compared to 81.3 expected. The S&P/Case-Shiller house price index rose 12.2% compared to 12.4% expected.

Positioning was also a factor as traders prepare for the wave of economic data and central bank statements that will end the week. The pound was under particular pressure, dropping more than a cent in US trading to 1.5224.

The Australian dollar showed no signs of rebounding after a dovish speech from Stevens moved RBA rate cut expectations to 90%. AUD is just 60 pips from a cycle low against the dollar and has broken support against a number of other currencies. Barring a surprisingly dovish Fed and a turnabout from the RBA, further support levels will break.

One of the larger movers on the day was oil. If the July rally in oil prices was quiet, the slide to $103 from $109 has been nearly unnoticed. It's a challenge to find reasons to buy oil with the IMF forecasting global growth at 2.2% and emerging markets struggling.

Highlights upcoming in Asia-Pacific trading include the Japanese Markit manufacturing PMI, Japanese labor cash earnings and Australian private sector credit. It's difficult to imagine markets reacting to the data with US Q2 GDP just a few hours away followed by the FOMC.  We remind that the GDP numbers could be tricky to read because of massive benchmark revisions.