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Trading #US $Dollar: Basic Macro Construct
Two key Dollar drivers:
#1 Growth/Inflation/Risk-sentiment (y-axis)=> Inflation Breakeven (BE) (/ Equities)
#2 Nominal Interest Rates (x-axis) => 10yr US Treasury Yield
1/10
Two key Dollar drivers:
#1 Growth/Inflation/Risk-sentiment (y-axis)=> Inflation Breakeven (BE) (/ Equities)
#2 Nominal Interest Rates (x-axis) => 10yr US Treasury Yield
1/10
Q=Quadrant
Q1: Risk-On-Lower Real Rates => Short USD
Q1: Risk-On-Higher Real Rates => Long USD
Q2: Goldilocks => Risk-On-Lower Nominal/Real => Short USD
Q3: Risk Off => Lower Rates => Equity Sell off/Bond Rally => Long USD
Q4: Risk Off => Equity & Bond Sell off => Long USD
2/10
Q1: Risk-On-Lower Real Rates => Short USD
Q1: Risk-On-Higher Real Rates => Long USD
Q2: Goldilocks => Risk-On-Lower Nominal/Real => Short USD
Q3: Risk Off => Lower Rates => Equity Sell off/Bond Rally => Long USD
Q4: Risk Off => Equity & Bond Sell off => Long USD
2/10
Performance since COVID, Mar'20
Q1:
- Higher BE/Risk On + Higher Nominals => 31% of all observations
- Good success (85%) on Short USD under lower Real (18.4% of obs)
- But higher Real under Risk On only 20% success on Long USD
- So despite higher Real, USD lower on Risk On
3/10
Q1:
- Higher BE/Risk On + Higher Nominals => 31% of all observations
- Good success (85%) on Short USD under lower Real (18.4% of obs)
- But higher Real under Risk On only 20% success on Long USD
- So despite higher Real, USD lower on Risk On
3/10
Q2: Goldilocks - most # of observations here (34%) but success on Short USD only 46%
Q3: Risk Off (lower BE, lower Nominal)-super successful (90% hit ratio) on Long USD
Q4: Risk Off (lower BE+higher Nominal) - Long USD again worked, 67% success but least # of obs (7.9%)
4/10
Q3: Risk Off (lower BE, lower Nominal)-super successful (90% hit ratio) on Long USD
Q4: Risk Off (lower BE+higher Nominal) - Long USD again worked, 67% success but least # of obs (7.9%)
4/10
Post Covid Summary:
Risk On:
- Higher BE => Short USD under both lower & higher real rates
- USD more driven by US twin deficit
- Also we have not yet seen any meaningful spike in real rates post Covid to test this
Risk Off:
- Lower BE + Lower Nominal => Long USD
5/10
Risk On: - Higher BE => Short USD under both lower & higher real rates
- USD more driven by US twin deficit
- Also we have not yet seen any meaningful spike in real rates post Covid to test this
Risk Off: - Lower BE + Lower Nominal => Long USD
5/10
How about over last two decades (since 2000)
Q1:
- Risk On + Higher Real (22.2% observations), some success on Long USD (57%)
- Risk On + Lower real - fewer observations but reasonable success on Short USD (65%)
Q2: Goldilocks - decent success on Short USD (65%)
6/10
Q1:
- Risk On + Higher Real (22.2% observations), some success on Long USD (57%)
- Risk On + Lower real - fewer observations but reasonable success on Short USD (65%)
Q2: Goldilocks - decent success on Short USD (65%)
6/10
Q3: Risk Off - most observations under this scenario (37%) but success rate just a coin toss (50%)
Q4: Risk Off (lower BE + higher Nominal) - 66% success on Long USD on higher Real Rates
7/10
Q4: Risk Off (lower BE + higher Nominal) - 66% success on Long USD on higher Real Rates
7/10
Summary - last two decades:
- USD did behave as per framework's expectations under all scenarios/quadrants with ~65% hit ratio, except pure Risk Off (Q3) where success was only 50%
- would have expected higher hit ratio on Long USD under Risk Off-ish / Lower BE scenarios
8/10
- USD did behave as per framework's expectations under all scenarios/quadrants with ~65% hit ratio, except pure Risk Off (Q3) where success was only 50%
- would have expected higher hit ratio on Long USD under Risk Off-ish / Lower BE scenarios
8/10
Sidenotes:
Weekly changes ('Discrete Correlation') to balance s/t & m/t trading horizon
Inflation BE assumed to represent risk/growth sentiment; since Covid, BE & SPX moved in same direction over 70% of wks
Here, Dollar = DXY (could also use Trade Wt Index)
9/10
Weekly changes ('Discrete Correlation') to balance s/t & m/t trading horizon Inflation BE assumed to represent risk/growth sentiment; since Covid, BE & SPX moved in same direction over 70% of wks Here, Dollar = DXY (could also use Trade Wt Index)9/10
Dollar Cycle?
Would (Q1: RiskOn / Lower Real) lead to ==> (Q1: RiskOn / Higher Real) ==> (Q4: RiskOff / Higher Real) ==> (Q3: RiskOff / Lower Nominal) ?
Thoughts / comments / feedback please
@chigrl @bondstrategist
10/10
Would (Q1: RiskOn / Lower Real) lead to ==> (Q1: RiskOn / Higher Real) ==> (Q4: RiskOff / Higher Real) ==> (Q3: RiskOff / Lower Nominal) ?
Thoughts / comments / feedback please
@chigrl @bondstrategist
10/10
