The USD is off to its worst start since 1985, down about 9%. In the chart below (courtesy of Bianco Research), it appears the USD is tracing its performance in 1985 quite closely. Of course, 1985 was the worst year for the USD in almost 40 years, so if we stay on the current path, expect the USD to drop another 10% from here.
The weak USD is setting up a possibly profitable rotation out of US equities into longer dated US Treasuries. In the next chart, I take the total return of our KLSU DM Americas Index (top 85% of North American market cap) relative to the JP Morgan Government Bond 15+ Years Index. I overlay the USD, and as can be seen from the chart, the relative performance of stocks vs. bonds tracks the USD fairly closely. If the stock/bond ratio follows the USD back to its May 2016 lows, bonds could outperform stocks by about 35%.
The likely mechanism is a plunge in real rates, or TIPS. In this next chart, I overlay 10-year TIPS on the USD (inverted). The last time the USD was around this level, 10-year TIPS yields were zero.
