Talking Points:

• Yen slumps as global bond yields soar following FOMC rate decision
• New Zealand Dollar hurt as yield advantage shrinks, Aussie holds up
• Upbeat CPI may add fuel to US Dollar rally as Pound ignores BOE

The JapaneseYen underperformed as Asian bond yields followed US Treasury rates higher following the Federal Reserve monetary policy announcement. The FOMC said it now expects to raise the benchmark lending rate three times next year, up from a pair of hikes projected in September.

Higher borrowing costs in the US may boost the cost of capital in general considering that the US Dollar is the undisputed global reserve currency. This narrative seems to be pushing up yields market-wide, spurring carry trade demand and weighing on the go-to funding currency.

The New Zealand Dollar likewise traded lower against a backdrop of narrowing yield spreads between the heretofore go-to carry venue in the G10 FX space and its counterparts. The Australian Dollar managed to hold up following an upbeat set of labor-market figures.

For its part, the greenback continued to climb having posted its largest daily gain in nearly six months in the aftermath of the FOMC meeting as markets outside the Western Hemisphere took their turn to price in the announcement. The upcoming release of November’s CPI data may extend the move further.

The benchmark year-on-year inflation rate is expected to rise to 1.7 percent, the highest in 25 months. An upside surprise in line with a recent outperformance of US economic news-flow may drive continued steepening of the projected tightening path.

The Bank of England policy decision headlines the docket in European hours. Governor Mark Carney and company are widely expected to remain in wait-and-see mode as they monitor the impact of the Brexit referendum on growth and inflation.

On balance, the announcement may mean relatively little for the British Pound unless minutes from the meeting or the voting pattern on the policy-setting MPC committee implies a sense of urgency in countervailing building price pressure. This seems rather unlikely however. 

Asia Session

European Session

Critical Levels