• Home
  • Partners
  • Help and support
  • English
Pepperstone logo
Pepperstone logo
  • Ways to trade
    • Trading accounts

      Choose from two account types depending on your strategy

    • Premium clients

      Exclusive rewards and bespoke benefits for high-vol traders

    • Pricing

      Discover our tight spreads, plus all other possble fees

    • Active trader program
    • Refer a friend
    • Trading hours
    • 24-hour trading
    • Maintenance
    • Risk management
  • Markets
    • Forex

      Get great rates on majors like EUR/USD, plus minors and exotics

    • Indices

      Enjoy 24-hour pricing on the UK100, US30 and more

    • Commodities

      Trade on metals, energies & softs, with oil spreads from 2 cents

    • Shares
    • ETFs
    • Currency indices
    • Dividends for index CFDs
    • Dividends for share CFDs
    • CFD forwards
  • Trading platforms
    • TradingView

      Trade through the world-famous supercharts with great pricing

    • MetaTrader 5

      Explore the apex in trading automation with our execution tech

    • The Pepperstone platform
    • MetaTrader4
    • CopyTrading
    • cTrader
    • Trading tools
  • Market analysis
    • Navigating markets

      Latest news and analysis from our experts

    • The Daily Fix

      Your regular round-up of key events

  • About us
    • Who we are

      Pepperstone was born from the dream of making trading better

    • Company news
    • Company awards
    • Protecting clients online
    • Trading accounts

      Choose from two account types depending on your strategy

    • Premium clients

      Exclusive rewards and bespoke benefits for high-vol traders

    • Pricing

      Discover our tight spreads, plus all other possble fees

    • Active trader program
    • Refer a friend
    • Trading hours
    • 24-hour trading
    • Maintenance
    • Risk management
    • Forex

      Get great rates on majors like EUR/USD, plus minors and exotics

    • Indices

      Enjoy 24-hour pricing on the UK100, US30 and more

    • Commodities

      Trade on metals, energies & softs, with oil spreads from 2 cents

    • Shares
    • ETFs
    • Currency indices
    • Dividends for index CFDs
    • Dividends for share CFDs
    • CFD forwards
    • TradingView

      Trade through the world-famous supercharts with great pricing

    • MetaTrader 5

      Explore the apex in trading automation with our execution tech

    • The Pepperstone platform
    • MetaTrader4
    • CopyTrading
    • cTrader
    • Trading tools
    • Navigating markets

      Latest news and analysis from our experts

    • The Daily Fix

      Your regular round-up of key events

    • Who we are

      Pepperstone was born from the dream of making trading better

    • Company news
    • Company awards
    • Protecting clients online
USD

The USD Smile - visualizing why the greenback is a magical currency

Chris Weston
Chris Weston
Head of Research
Oct 20, 2022
Share

The USD is found form once again and is moving higher universally – we can put this down to higher US bond yields, while terminal fed funds pricing has moved towards 5%.

US 5yr real rates have traded in a 1.50% to 2% range since 26 Sept and now at 1.89% are threatening to break out topside - a factor which if plays out would see the USD move further highs and likely see’s the US500 push below 3600.

As most know the USD has been the clear place to be in 2022 – fundamentally, the USD ‘smile’ theory is one that can justify s much of the movement we’ve seen. If we consider the major drivers of the USD the list is extensive, but front of mind are:

  • US exceptionalism – the best house on the street
  • The best hedge against equity drawdown
  • Higher US real and terminal rates
  • The Fed almost welcoming a recession
  • Carry (income) – get paid to play defence
  • Fed QT impacting US and global financial conditions
  • US housing less impacted by rates than other countries (Aus and UK for example)
  • Momentum & trend

If we look at these variables and apply them to the USD ‘smile’ theory, we see that both sides have worked positively for the USD.

The left side, which shows the USD working as risk aversion flows and concerns of deteriorating global growth hit home. On the right side, we’ve also seen signs that US data has held up better than other geographies, and this has seen the USD work as the ‘exceptional’ play.

Preview

Perhaps the preferred way to look at the absolute quality of the USD is in this chart – here I’ve taken two key inputs from the ‘major drivers’ list to showcase the USDs attraction.

Preview

On the Y-axis we see the 60-day correlation with the S&P500 and on the X-axis we see the 1-month swap - we’ve used this to show the income received from a cash like product. What we see is the USD is the only G10 currency with a negative correlation with the S&P500.

We also see the USD offers some of the highest levels of carry (income), with cash-like returns rivalling that of Canada and New Zealand. Funds are effectively getting paid to play defence – what’s not to like??

Correlations come and go, but unless we see a sustained turn in the equity market, global growth looks to bottom and the Fed offer a stronger indication of a ‘pivot’, then this model shows why funds are so keen to gravitate to the USD.


Related articles

Terminal rates - what are they and how can they help FX traders?

Forex
Trading

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.

Other sites

  • The Trade Off
  • Partners
  • Group
  • Careers

Ways to trade

  • Pricing
  • Trading Accounts
  • Premium Clients
  • Active trader program
  • Refer a friend
  • Trading hours

Platforms

  • Trading Platforms
  • Trading tools

Markets and Symbols

  • Forex
  • Shares
  • ETFs
  • Indices
  • Commodities
  • Currency indices
  • CFD Forwards

Analysis

  • Navigating Markets
  • The Daily Fix
  • Meet our Analysts

Learn to Trade

  • Trading Guides
  • Videos
  • Webinars
Pepperstone logo
support@pepperstone.com
+254203893547
The Oval | Ring Road Parklands
P.O.Box 2905-00606 | Nairobi, Kenya
  • Legal documents
  • Privacy policy
  • Website terms and conditions
  • Cookie policy
  • Sitemap

Risk Warning:

Margin trading products are complex instruments and come with a high risk of losing money rapidly due to leverage. 84% of retail investor accounts lose money when trading on margin with this provider. You should consider whether you understand how margin trading works and whether you can afford to take the high risk of losing your money. You don't own or have rights in the underlying assets. Past performance is no indication of future performance and tax laws are subject to change. The information on this website is general in nature and doesn't take into account your personal objectives, financial circumstances, or needs. Please read our PSF, RDN and other legal documents and ensure you fully understand the risks before you make any trading decisions. We encourage you to seek independent advice.

The information on this site and the products and services offered are not intended for distribution to any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

Pepperstone Markets Kenya Limited 2nd Floor, The Oval, Ring Road Parklands, PO Box 2905-00606 Nairobi, Kenya is licensed and regulated by the Capital Markets Authority.

© 2025 Pepperstone Markets Kenya Limited | Company No.PVT-PJU7Q8K | CMA License No.128