Deutsche: Yield Up/Equities Down Episodes Boost USD

Deutsche looks at the current cycle's FX trading environment through the lens of correlation shifts between the direction of the S&P and 10Y Tsy yields:

• "initially i) higher bond yields were driving equity prices lower; ii) followed more recently by lower equity prices, pulling bond yields lower. This is not usually the end of the story for iii) as bond yields head lower they help stabilize and support equities (this may already be happening); and iv) eventually more resolute/firmer equities pull bond yields up where the cycle may begin again."
• Looking at history, their broad approach is: buy USD in a yields up/equities down environment (seen this year through April); JPY outperformance (esp vs commodity FX) in a yields down/equities down environment as seen recently; conversely buy AUD/EM Carry in an yields up/equities up environment; but EM carry preferred to commodity FX in a yields down/equities up environment.
• They see yields up/equities down "at least episodically reasserting itself, as the Fed errs on the side of Volcker after last year straying on the side of Burns" - benefiting the USD as it did through April, vs FX w central banks that are lagging (BOJ, PBOC, BOE), not so much vs ECB "that will likely tighten beyond the Fed".

Source: Deutsche Bank