Some folks are concerned about the possibility that Donald Trump's (probably) ill-advised decision to exit the Iran nuclear deal is going to stoke inflation on the back of surging crude prices.

Oil at three-and-a-half-year highs is set against late-cycle fiscal stimulus in the U.S. and the prospect of tariff-related price pressures. Clearly, the question is whether all of that together might be enough to cause problems. One thing worth noting (and really, there's an argument to be made that given the myriad structural drags on inflation, this is the only thing worth noting), is that the “problem” here isn't so much the fear of runaway inflation as much as it is the prospect of the Fed overtightening in an effort to ensure inflation expectations don't become unanchored. Overtightening risks inverting the curve which in turn raises the specter of a recession, etc.

This is ultimately what's allowing the dollar and crude to rise together. As Deutsche Bank put it months ago, “what complicates things is that the behavior of real rates at this point is also a function of expected inflation: Higher inflation warrants a more hawkish Fed and therefore pricing in higher real rates.” Well, a more hawkish Fed underpins the dollar and although the EM mini-rout took a breather this week (five-day rally for EM equities and the MSCI EM FX index closed the week on a decent note), recent outflows and the still pressing concerns in Argentina and Turkey mean developing nation assets are likely to remain on edge until there are compelling reasons to believe that the dollar rally has run its course.

This is why folks have been rolling out the breakevens versus crude charts so much lately. Here's the longer-run view:

(BBG)

And here's the 5-day which appears to suggest that the link broke down a bit on Tuesday afternoon amid the absurd headline hockey that preceded Trump's official announcement, but you get the idea.