Lesson 4
Connection 5-6: Dollar & Curve
When DXY is rising, avoid EM and commodities regardless of their 'fundamentals.' When the curve inverts, start timing the recession. When it steepens after inversion, defensive positioning becomes urgent.
📊 Indicators mentioned in this lesson (click for details):
Connection 5: DXY → EM & Commodities
The dollar is the inverse of everything else. When DXY rises, it crushes EM and commodities. When DXY falls, they rally.
Mechanics:
- EM: Dollar debt burden rises with DXY. Currency weakness compounds.
- Commodities: Priced in dollars. Higher DXY = lower commodity prices.
- Multinationals: Foreign earnings translate to fewer dollars.
Thresholds:
- DXY > 100 and rising: Hostile to EM, commodities
- DXY < 100 and falling: Supportive of EM, commodities
- Rate of change > 2%/month: Strong signal
Connection 6: Yield Curve (T10Y2Y) → Recession Timing
The 2s10s (T10Y2Y) spread (10Y - 2Y) is the best recession predictor.
Phases:
- Normal (upward sloping): No recession signal
- Flattening: Late cycle, recession risk building
- Inverted (2Y > 10Y): Recession warning, 6-24 month lead
- Steepening after inversion: Recession imminent/starting
The Nuance:
Inversion is the WARNING. Steepening after inversion is the TRIGGER.
Why? Steepening happens when Fed starts cutting (2Y falls) or investors flee to safety (10Y rises). This typically occurs as recession BEGINS.
Check your understanding
Lesson Quiz
Quiz Check
Why does a rising DXY crush emerging markets?
Quiz Check
DXY has fallen from 110 to 100 over 6 months. Where should you look for opportunities?