Thread by @VaradMarkets

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

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

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

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

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

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

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

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

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

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