FX Update: US yield curve conundrum, USDJPY seasonality FX Update: US yield curve conundrum, USDJPY seasonality FX Update: US yield curve conundrum, USDJPY seasonality

FX Update: US yield curve conundrum, USDJPY seasonality

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  As 2022 looms into view, it is worth looking at and trying to understand why the US yield curve remains so flat and what this could mean for the US dollar next year as the Fed policy trajectory for the coming cycle has picked up sharply for the year ahead, but not beyond that. Also, it is worth considering whether USDJPY is set for a fourth consecutive pump and dump as we are set to roll into a new quarter.

FX Trading focus: US yield curve conundrum. USDJPY set for another rollover into new quarter?

In this morning’s Saxo Market Call podcast, we discussed, among many topics, perhaps the most important conundrum as we head into 2022: why the US yield curve remains as flat as it does, held down chiefly by the long end going nowhere even as the 2-year US treasury benchmark yield notched a new cycle high today near 75 basis points, and what that may tell us about the prospects for the US dollar. I have touched on the subject in previous columns, but it is certainly worth additional effort to understand why this is happening and to sketch out possible scenarios for what this will mean for the global markets and for the US dollar if the market is proven right and if it is proven wrong.

Why do long US treasury yields remain so low, and hence keep the “terminal” Fed policy yield for the coming cycle so low (well south of 2.00%)? I ran across the best recent discussion on this very subject just yesterday, a discussion between “Convexity Maven” Harvey Bassman and Jeff Snider of Alhambra Capital, with further commentary from Mike Green. The conversation is billed as one centering on inflation vs. deflation, but I found the discussion around the shape of the yield curve and Jeff Snider’s points on where money is created (chiefly in the global “Eurodollar” or offshore USD system) as the place we need to focus to be the most interesting. His message is that the forward policy curve and the US yield curve are telling us that the Fed can only go so far before triggering the next seize-up in the system that then requires a new easing while reminding us that yields are so low on US and especially Japanese and EU debt because the premium for liquidity is so high. This seems a more likely reason for yields remaining low beyond the 1-2 year time frame than that the market  is making any strong statement in its belief in whether inflation will remain high.

So how does this hiking cycle play out and what about the US dollar? That very much depends on whether inflation subsides substantially in the nearer term. If it does fade sharply (even if still above 2%) and the Fed is repriced to only hike a couple of times at most because an oncoming recession take shape, brought forward by the significant fiscal drag that began with the end of many benefits already in September, this would like prove USD negative, particularly against the Euro and the yen as yields drop further and the market warms up for a new round of Fed easing as asset prices come under pressure from a profits recession anticipated for equities.

In a more benign scenario, if inflation only eases slightly and the economic growth outlook remains positive if decelerating in the first half of next year, the Fed will remain on schedule to hike starting in March and may even have to pick up the pace of hikes slightly beyond what is now anticipated. But other central banks may move more quickly than the US, meaning a broadly weak US dollar as the Fed talks big but effectively remains behind the curve, weakening the US dollar versus riskier currencies within the G10 and especially versus EM currencies if real US rates remain extremely low. Even the Euro might rise smartly in this scenario, provided the ECB is forced into a capitulation on having to end it negative rates policy.

Chart: USDJPY - quarterly roll effect, round four?
USDJPY nearly rose to 115.00 this morning before easing back as the recent rally has only seen modest support from longer US treasury yields, normally a critical coincident indicator for JPY weakness. Other indicators, like strong energy prices and strong risky assets of late (especially EM) are more fitting with JPY weakness. It is certainly worth noting the clear signs this year that quarter-to-quarter rollovers have seen strong surges higher in USDJPY into quarter-end, followed by at least a solid mean reversion once the quarterly roll has passed. Are we set for another one of these into next week? Certainly worth keeping an eye on.

Source: Saxo Group

Other bits and pieces.
Interesting to note the fairly aggressive rally in AUDNZD into year-end that seems short on drivers, at least in relative rate terms, although some of the attractiveness for the Aussie is likely in the anticipation of more upside potential on a post-pandemic rebound relative to New Zealand, which saw fewer limitations, as well as the anticipation of more stimulus to arrive from China. Elsewhere, NOK is performing strongly on Norwegian rates almost recovering the highs prior to the omicron variant announcement. SEK looks a bit unfairly priced relative to the strong equity market, though it saw a bounce today and may have been a bit under the NOK’s thumb recently in the crosses. EURCHF is under pressure again – still thinking that the SNB will only put up a major fight closer to parity.

Table: FX Board of G10 and CNH trend evolution and strength
Not much to report here save for the JPY weakness and the NOK strength as we watch and see how the early days of 2022 take shape.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note that EURUSD is trying to flip up to a “positive trend” since yesterday, but the entirety of December’s trading action has been within the range of the last week of November, though the chart certainly look spring loaded to do move out of the tight range in the first weeks of 2022. Elsewhere, the oldest trend on the table, the 77-day EURCNH downtrend, looks about set to reverse, encouraged by recent signs that China is against a stronger currency.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1400 – US Oct. House Price Index
  • 1500 – US Dec. Richmond Fed Manufacturing Index


The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992