Forex Today: USD-favorable yield spreads ahead of the Fed meeting

The American dollar is flatlined, but it could regain the bid tone ahead of tomorrow's FOCM rate decision, indicate the benchmark bond yield spreads.

The US-German 10-year yield spread rose to 209.5 basis points yesterday; its highest level since April 12. Also, the 10-year US-UK yield spread rose to 118 basis points (bps); its highest level since Aug. 15. In both cases, the widening of the yield spread indicates good times ahead for the USD.

The 10-year Australia-US yield spread remains near the 17-year low of 10 bps hit on Nov. 30. The spread may turn negative (AUD would lose its high yielding currency status) if the Fed sounds hawkish and Thursday's Aussie labor data disappoints expectations. Meanwhile, the 10-year US-Japan spread continues to move in a sideways manner in the range of 225 bps to 240 bps.

What's brewing in forex majors?

GBP/USD - The bearish 5-day MA & 10-day MA cross, coupled with the breach of ascending trendline and widening US-UK yield spread rises indicates the spot is on the back foot ahead of the UK CPI release.  Kathy Lien from BK Asset Management writes, "the UK economy is performing better since the BoE raised interest rates in November but at the time, they said inflation peaked, which suggests that tomorrow's CPI report could come in softer. If they're right and price pressures eased in November, then GBP/USD could take out 1.33 easily."  

EUR/USD - Candlestick patterns signal confusion in the market, but a USD-favorable rise in the US/DE yield spread indicates the downside is still in play. Also, EUR/USD risk reversals have adopted a bearish bias.

USD/JPY - The mood for risk continues in Tokyo and the yen is struggling in this environment ahead of the FOMC's expected rate hike later this week.

AUD/USD - dropped to 1-hour 50-MA level of 0.7519 after the data released in Australia showed the house price index dropped 0.20 percent q/q in the third quarter vs. expected print of 0.5 percent. Meanwhile, the National Australia Bank's (NAB) business confidence index fell 9 points to +12 index points in November. Business confidence also retreated from +9 (last month) to +6 in November.

Macro notes

Brexit commentary to be closely watched - ANZ

Australia: Business conditions drop but are still elevated, tentative signs of wage growth - NAB

Moody's - Leverage in China to increase at a slower pace

Moody's sees tightening bias in China

Saudis to slash oil exports to Asia by 100,000 Bpd

RBNZ: how will new Governor interpret the intended "dual mandate" - Westpac

JOLTS: decreased 181k in October to 5996k - Nomura