Xmas madness: Thoughts on USD, Rates, JPY

Sometimes life comes at you fast, today is one of those moments.

Short version: 1) If you want to chase the stronger USD view, do it in JPY. 2) If you think the front end is priced to perfection and if anything the risk is we price back in cuts for 2025 (thanks to US data surprises turning lower) then why not look at steepeners? 2s10s just got a lot easier to get involved in.

1. We’ve reached most our core targets for Dec, but we expect a continued move in Jan. We’ve had the long USD, hawkish rates view since Sep/October, wondered why the market took the Bessent appointment so well in Late Nov but remain firmly of the view it was a painful position squeeze and not a new trend. We kept our targets for Dec (1.03 in EUR, 157 in JPY, 4.60% in UST10s) and expect in Jan a continued move (1.01 in EUR, 160 in JPY, 4.7% in UST10s) so the question is what will get us there? We’ve also had a 4% terminal rate call from our US Econ team for quite some time so there is less to do in the front end as the market has fully shifted to our view but more to do in long end curve plays (thoughts below).
2. What next? We’re witnessing the typical fade after a big move like we saw last night, but we would argue the USD rally and US long end selloff have more to go in early Q1. But markets don’t move in linear lines – I suspect Jan 20th is the moment to truly take profit on these Trump trades even when tariffs are rolled out this market may have priced in “maximum fear” in the uncertainty of the event, to then price out the tail risks once we know the fact (I do expect Trump follows through on blanket tariffs, but it may be low to begin with or staggered out over the year). It feels a lot like 2018 when a Hawkish Powell in December then had to soften the tone in Jan 2019…is this the same playbook? I will note US data surprises are falling – at some point the market could snap back. But the two data points that actually matter (CPI and NFP) are not – and surveys are likely to contain a “Trump euphoria” premium until later in Q1. ?You need a really weak Initial claims today to upset the apple cart, then it’s just mid to low tier data during the Xmas period until ISM Manufacturing (3rd Jan) but really we’ll have to wait until the 2nd week of Jan for the Labour data to truly know if this US exceptionalism story carries on.
3. Leading indicators suggest the Fed should be worried about resurgent CPI risks and less so about falling employment. Nowcasting GDP for Q4 continues to track along consistently at 3.1% or so, core inflation has been consistently above 0.2% to 0.3% for the past four months and NFIB survey suggests firms are raising hiring and price intentions after the election. Couple that with higher natural gas prices in the US (DOE study yesterday leaves a path for Trump to ramp up exports by removing Biden’s export cap) and we should see energy services contribution to CPI pick up too. Charts below from NFIB suggest unemployment could actually fall again…
4. The US Curve is looking very interesting! Curve plays had been made difficult by Trump (fiscal steepening, but tariff flattening) and we expected it to be a mess post election - but something is developing here that could prove very interesting....A hawkish Fed, but steeper curve - is not the usual playbook but with so little priced in terms of Fed cuts next year (only 36bps priced by Dec 25) it opens up the possibility of early 2025 switching from a bear steepening story into a bull steepening If US data surprises continue to slow down as our FCI loop framework would imply. The front end is also likely to be more anchored than the long end with a) Fed dots already revised substantially for 2025 to the market pricing b) More clarity over US fiscal plans approaching in Q1 c) Trump killing the government shutdown deal yesterday in order to raise the debt ceiling doesn't sound too fiscally hawkish to me! d) more of a slow burner but term premium to finally stand up? We've got 2s10s steepening to 35bps in in Dec/Jan, we're at 20.7bps now with the forwards curve flattening of late making it more attractive to play for a further steepening (1m forward prices 19.5bps, 3m 20.8bps, 1y 23.7bps).
5. Why does the JPY move have legs? Why might this JPY move have legs? Worth remembering we went into this BOJ meeting with a decent LONG JPY position playing for a December hawkish surprise... It's nowhere near as extreme as it got to after the carry trade unwind but we've got some more room for USDJPY to reach 157 to 160 in early Q1. Chart below.

Charts:

1. US 2s10s not yet triggering RSI but it’s close, as it was in July-August I don’t see it being a problem and we could be in for another leg higher, this time driven by the long end.
2. It’s gotten a lot cheaper to express the view thanks to the forwards curve flattening. Could we see a move to 35bps as we expect?
3. The market has been caught long JPY once again – it means this JPY move to 160 has legs as we face a position squeeze here.
4. The USD is spookily following the 2016 playbook to the letter. There’s another 1% or so before it tops out and gets faded if using that template. I expect Jan 20th is the true moment for that.
5. US Macro validates the hawkish market pricing, NFIB survey suggests a lower unemployment and higher prices in CPI going forwards!
6. US data surprises are likely to keep falling if the FCI message holds (has done for the past three years).
7. BUT US rates are likely to ignore that for now as the two key data points (CPI and NFP) are not giving the same message as the broader picture from data misses (due mostly to high expectations from Econ’s post elections).

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Jordan Rochester

Head of EMEA FICC (Macro) Strategy

Executive Director

Mizuho Bank, Ltd.

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Mizuho EMEA

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London, EC4M 7AU

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