The easiest way to become a trade-a-saurus is to assume correlations will continue forever and mindlessly fade divergences with the assumption they will recouple. Yet these divergences often offer clues that something might have changed and deserve further investigation.

Over the past couple of decades, ten year US inflation breakeven levels have traded inversely with the US dollar. This should be no surprise and makes sense. Lower US dollar equals more inflation.

It is not the tightest of correlations, but have a look at the broad moves - the two series definitely head in similar directions over the majority of periods.

Let’s zoom in and have a look at a shorter time frame.

From 2009 to 2014 ten year breakevens traded on top of the inverse US dollar. Even after the US dollar started its big run in the summer of 2014, the two stayed positively correlated. The US dollar rallied much harder than inflation breakevens fell, but they were still going the same direction.

But have a look at the last year (highlighted by the red rectangle). During this period the US dollar has rallied strongly (lower on the chart), yet inflation breakevens have rocketed higher.

Not only has the relationship broken down, it seems to have completely reversed.

Let’s look at another chart, but instead of inverting the US dollar, I have left it untouched.

For the past year, ten year breakevens appear to be trading almost tick for tick with the US dollar.

I understand the logic behind this relationship - economic upticks (or even the discounting of future growth) are causing inflation expectations to rise along with US rates and the US dollar.

Yet I want to highlight the fact that this relationship is actually contrary to the long term trend.

I don’t know for how long this contra-trend will continue (it feels like forever), but if I had to bet, I would guess that eventually the US dollar will head a lot lower and inflation expectations considerably higher. I wouldn’t count out the first chart recoupling at elevated levels… but then again, I think that makes me a trade-a-saurus.

Thanks for reading,
Kevin Muir
the MacroTourist