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The FX Trader: Rising global yields resetting the narrative
Summary: Yields aren’t just rising in Japan any longer, though US treasury yields are so far still quiet. Will the FOMC meeting tomorrow, even if it generally fails to surprise, unleash the bond bears in the US as well? FX volatility more widely will pick up if yield volatility does likewise.
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.
Technical and other observations for key pairs.
- Dollar Index – completely in limbo after the recent bearish reversal as the break below the 99.00 area failed to spark further momentum – looking for the incoming event risks for clues.
- EURUSD – same as above, with the key area being the stick 1.1650 zone – needs to find momentum above the recent highs and into 1.1700+ to rejuvenate the upside focus.
- JPY pairs – rising global yields are pressuring the JPY until either Japan intervenes or something changes the narrative for bonds. USDJPY resistance at 156.54 and then not until the 157.89 top, with intervention risks above that level and into 160.00. EURJPY is within twenty pips of its all time highs from November at 182.01.
- GBPUSD and EURGBP – EURGBP posted a bearish reversal, but the price action is bottled up – still looks bearish for 0.8650 or lower as long as it remains below 0.8800. For GBPUSD, the US dollar direction is the key, with 1.3250-75 as the support zone.
- AUDUSD and AUD pairs – It’s not just AUDUSD that is showcasing AUD strength – AUDJPY is reaching the highs since mid-2024 and if it keeps rallying, will be working into a chart range above 106.00 that has held back the pair for the last 25 years and more on multiple occasions. As noted above AUDUSD focus is the big range high just above 0.6700, while EURAUD is poking at six-month lows.
- USDCAD – the Friday jobs report has reset the narrative. Resistance is 1.3900-25 as the focus has now shifted to the 2025 lows of 1.3540.
- NZD – the new RBNZ governor will host a media Q&A this evening at 19:10 GMT
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Note the ice-cold volatility readings for all of the G10 currencies plus CNH (the ATR ranking) as we wonder whether volatility might pick up on the other side of the FOMC and next key US data releases. For now, the JPY weakness stands out most prominently, with AUD the strongest after the recent surge in AU rates on strong employment and inflation data.
Table: NEW FX Board Trend Scoreboard for individual pairs.
New trends in EURGBP after the recent drop – awaiting follow through there, while EURCAD has recently lurched into a downtrend on CAD’s surge. AUDNZD failed to confirm any downtrend and is now vying to re-establish the long-standing bull trend. EURSEK is looking heavy again but needs to break down through 10.90 to get fresh momentum after range trading for three months
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..