The FX Trader: Rising global yields resetting the narrative

It’s not just Japan anymore: global yields are on the rise – and the FX impacts will rise as well should the other side of the FOMC event risk see US treasury yields breaking out of recent ranges. Recently, the market has mostly focused on the rise in Japanese yields and especially Japanese long yields, to the detriment of the Japanese yen, as the situation is straight from the emerging market playbook (largely because Japan’s officialdom is so far failing to push back against developments, leading the market to suspect this negligence is by design.)

But elsewhere, several sovereign bond markets have been under increasing pressure as well: German 10-year Bund yields burst higher Monday, up through the top of the range since the fiscal package was announced early this year, Australia’s yields have lifted aggressively after recent employment and inflation data and on the RBA overnight (more on this in the AUDUSD chart below). And last Friday, Canada’s two-year yield ripped more than 15 basis points higher on the November employment data, which surprised massively on the strong side (the employment rate plunging to 6.5% versus 7.0% expected and 6.9% in October!)

So far, the 800-pound gorilla of bond markets, the US treasury market, remains quiet – but should that beast awaken after the FOMC meeting, FX volatility is likely to spike considerably.

Looking ahead
How will the FOMC meeting play? The votes are clearly there for a cut, and Powell and company won’t want to surprise expectations that are 92% priced for a cut. With the key data still yet to be released until after tomorrow’s meeting, including the November jobs report and the November CPI, guidance can’t be anything except cautious and data-dependent. Will this allow the USD bears to pounce, given expectations that the Fed will generally prove dovish beyond next May, with or without a weak US economy? In other words, if US economic data remains sluggish, we can expect more cuts than the three priced in (including tomorrow’s), while we can expect other central banks to out-hike the Fed if the US data shows that the US economy is bottoming out and rebounding. This is my default expectation, though any surprisingly strong US data could make the path to a weaker US dollar difficult.

Different playbooks on rising yields. Interesting to note that rising Japanese yields are seen as a devaluation trade for the yen because Japan is seen likely intervening with yield-curve-control or some other measure at some unknowable point, while rising yields elsewhere are seen as FX-positive (Canada and Australia), but how would rising long US treasury yields be viewed? On the one hand, at some level not so far above 4.25% in the US 10-year yield, global risk sentiment would come under pressure. But how would the market treat the US dollar – like the yen? In any case, the US treasury market is the key variable right here and volatility could be set for a breakout once we get the backed-up US data releases.

Chart focus: AUDUSD
The RBA on Tuesday delivered the unsurprising message that it sees no further prospects for rate cuts in the foreseeable future. Australia’s two-year yields jumped ten basis points higher in response, hitting a new high for 2025 and supporting the AUD once again. AUDUSD rebounded from the lows overnight as it tries to remain comfortable above the key 0.6600 level. The currency pair has traded in a tight range seemingly forever, so the focus will be on the 0.6700 level should the US dollar weaken broadly on the other side of the FOMC and the next key US data release, possibly opening up the range to 0.7000 and higher.