There is a tension between two major competing factors in the USA:
- An unorthodox, disruptive trade policy
- Highly expansionary fiscal and regulatory policy
It's tough to game-plan on how those two balance out. The +15% tariff rates are so far outside of the historical record that it's challenging to sort out the impacts. Meanwhile, much of the tax cut went to high-income earnings, which has a limited amount of spillovers and regulatory policy is hard to model.
It's starting to look like the FX market underestimated the fiscal side while over-estimating the trade drag. That's not a surprise given that the US went so far out of the orthodoxy with the trade war.
If there is a big re-think, there is a big opportunity for the US dollar here. Just this week, the Fund funds market has priced out about 10 bps in easing in the coming year. The US dollar index is also trying to bounce after a brief break of the July low.
