FX Daily: Refocus on fiscal proving dollar supportive. The dollar has found a little support overnight after the House passed a budget blueprint bill laying the groundwork for President Trump's tax-cutting agenda. The focus on fiscal might buy a little time for the dollar and distract from weaker consumer activity until the tariff agenda comes back into focus next week. USD/CAD is now the epicentre of tariffs
Having been under pressure on a weak set of consumer confidence readings, the dollar has found a little support overnight on news that the House has passed a budget blueprint bill. While not detailing changes to particular spending or revenue plans, the bill is seen to pave the way for around $4tr of tax cuts – seemingly at the cost of a $2tr reduction in Medicaid spending. The bill would also seek to raise the debt ceiling by $4tr and kick the risk of a government shutdown down the road. In response, US 10-year Treasury yields are around 5bp above yesterday's lows and USD/JPY has found support under 149. Please see our rate strategy team's latest views on Treasuries here.
The return of the financial market focus on tax cuts can probably buy the dollar a little time before we return to the issue of trade. The tariff story is going to start heating up again next week as we approach the 4 March deadline for tariffs against Canada and Mexico. Recall this was the tariff threat in response to insecure borders and not the tariff threat related to steel and aluminium imports (likely coming in on 12 March), nor the threat from reciprocal tariffs (likely coming in sometime in April).
And it now looks like USD/CAD is the FX market's lightning rod for the tariff story. This is evident in the FX options market, where the one-month skew for USD calls and CAD put options remains high at 1.7% vols in favour of CAD puts – not far off the last January peak near 2.00% vols. Investors are clearly worried that tariffs are not merely negotiated away in Canada.
Today's US data calendar is relatively quiet and merely contains January New Home Sales (likely impacted by poor weather and a speech later in the day by the Fed's Raphael Bostic). On the Fed, the market is toying with Fed Funds being cut as low as 3.50% by the end of 2026 and has moved beyond pricing two 25bp Fed cuts for this year. The next important input into that pricing comes on Friday's release of the core PCE deflator for January, where a consensus 0.3% MoM reading might also put a brake on the momentum towards more Fed easing.
We continue to expect DXY to find support in the 106.00/106.30 area and expect it to be trading back above 108 once the tariff story picks up again over the coming weeks.
