US HIA2: Dollars for dollars – Goldman Sachs

Research Team at Goldman Sachs suggests that corporate tax reform has been an especially hot topic since the US election and so GS takes a look at the impact one component of that reform, a one-time low-tax holiday for repatriated earnings – often referred to as “HIA2,” – might have on FX markets.

Key Quotes

“Our bottom line is that while the headline numbers seem huge (with $2.9tn in undistributed foreign earnings since 2005), the actual FX impact from a potential “tax holiday” is likely quite small. When we go through the numbers, we note that the actual tax bill would be much smaller. But more importantly for our markets, we find that the vast majority – perhaps 80 percent – of “overseas” cash is probably held in Dollars already. As a result, US Dollar cash and future revenues could probably cover the cost of the tax bill without any forced FX conversion. That is not to say that FX markets should ignore this area of policy completely.”

“A “tax holiday” is likely only in the event of broader tax reform. Aspects of the House Republican blueprint – notably destination-based taxation – could have major Dollar implications.We think the Dollar rally can extend much further if there is meaningful fiscal stimulus in an economy that is already close to full capacity.”