The dollar index rose 0.34 percent, with the euro down 0.38 percent to $1.2011. The euro fell to a session low versus the dollar after the release of minutes from last month's Federal Reserve meeting. During the meeting, Fed policy makers decided to raise short-term interest rates for a third time in 2017
A PROVISION in the GOP tax plan giving U.S. companies a one-time cut for repatriation of earnings and cash held overseas could ripple through financial markets, including currencies, foreign savings vehicles and dollar funding for global banks.
The details of a final tax plan remain unclear, as the Senate bill passed early Saturday morning still needs to be reconciled with the House bill passed in November. But the vast sums of cash held abroad by large U.S. corporations such as Apple Inc. and Microsoft Corp. are a tantalizing target for the Internal Revenue Service and companies themselves, as they could use that money for investing at home - or, simply to return to eager shareholders through buybacks or dividends.
However, questions remain about precisely how the trillions of dollars in U.S. corporate profits are stashed overseas—and how a potential sudden mass repatriation of that cash could warp markets.
The balance of U.S. corporate earnings held overseas, and outside Uncle Sam’s clutches, by Russell 1000 companies reached US$2.6 trillion in 2016, according to data consultancy Audit Analytics, a figure that has more than doubled since 2009.
Much of that money is likely already held in dollars, though researchers aren’t sure how much. And if companies abruptly bring that cash home could mean a sudden shift in currency markets, and a potential run on the instruments where the money is currently parked.
Even a small portion of the total pile could amount to hundreds of billions of dollars’ worth of euros, yen, Swiss francs and other currencies being exchanged for greenbacks, leaving those currencies in line for a sudden fall.
“Even though I do think most of the money is in dollars, even if 25% is not dollars we’re talking about flows that are going to be of the order of a minimum of US$1.5 trillion, maybe as high as US$2 trillion,” said Steven Englander, head of research and strategy at Hong Kong hedge fund Rafiki Capital. “And 25% of that is a decent chunk.”
Goldman Sachs researchers believe that around 20% of the total is probably held in currencies other than dollars, but others suggest a higher figure. The nondollar portion could be as high as 40%, according to researchers at Bank of America Merrill Lynch.
The Senate Republican tax plan proposes a one-time 14.5% tax on earnings held overseas, which would then be regarded as repatriated. The House bill suggests a 14% tax. Currently, companies returning such cash hoard to the U.S. would be hit with the 35% U.S. corporate tax rate.
“The terms under which they’re going to be able to repatriate are not as favorable as they wanted, but they’re the best they’re going to get. Any future change is going to be for the worse,” Mr. Englander added. That means companies are likely to act fast, which could distort markets in the short term.
Several analysts have looked to 2004’s Homeland Investment Act for clues as to what might happen. The one-time tax break for repatriations came into force the following year, and after declining in 2002, 2003 and 2004, the dollar rose by around 13% in 2005.
But even if the overwhelming majority of the cash is already in dollars, as many analysts expect, the potential market reactions may not stop there.
A chunk of U.S. corporate cash trapped overseas is invested in offshore U.S. dollar money-market funds. A 2016 Deutsche Bank study based on 12 companies with some of the largest overseas cash balances suggested that around 25% of the total was held in cash or cash equivalents, a category including money-market funds.
Of the 30 companies whose debt makes up the largest share of those money-market funds, 28 are banks based outside of the U.S. The funds hold US$241 billion in those banks’ bonds, according to Crane Data, which tracks money markets.
As companies return cash to the U.S.—even just to onshore money-market funds—a previously reliable source of greenback funding for global banks could shrink.
U.S. dollar borrowing by foreign banks is the most likely source of funding strains, according to Mark Cabana, head of U.S. short rates strategy at Bank of America Merrill Lynch.
During the final quarter of 2016, when new U.S. money-market rules, which also reduced dollar funding to global banks, took effect, the euro-dollar cross-currency basis—a measure of the cost of borrowing dollars in exchange for euros—blew out to its widest levels on record.
“The reshoring of cash could put increased pressure on dollar funding markets overseas, widening the cross-currency basis,” said Gennadiy Goldberg, U.S. strategist at TD Securities. “Some of the recent move may be due to year-end pressures, but we don’t expect to see a reversal.”
To be sure, other analysts believe so-called repatriation may actually fall on U.S. assets, as money flows out of high-quality U.S. bonds. Though money is technically located outside the U.S. for tax purposes, it can be used to buy U.S. government and corporate debt.
“To me it looks like the majority of the cash and cash equivalents are actually held in the U.S.” said Margaret Kerins, head of fixed-income strategy at BMO Capital Markets, who conducted an analysis of the financial statements of the 10 companies with the largest overseas cash piles.
Ms. Kerins added that U.S. Treasurys and corporate debt had the potential to be most negatively affected by the change. -WSJ
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