Synopsis:

SocGen highlights how 2-year bond yields in the US, Germany, and Japan shape FX trends, emphasizing the need to track future yield moves. While the dollar’s uptrend has historically followed rising US yields, uncertainty around ECB and BoJ policies clouds the EUR and JPY outlooks.

Key Points:

• USD Strength Linked to Yields: The dollar’s historical rallies were driven by rising US 2-year yields, notably from 0.1% in 2011 to 3% in 2018, and again toward 5% in 2021-22.
• EUR/USD Dependency on Schatz Yields: Previous EUR/USD rebounds coincided with rising German Schatz yields, though these moves proved temporary amid broader economic challenges.
• BoJ Uncertainty: The BoJ’s indecision on rate hikes has frustrated expectations for a sustained JPY recovery, leaving USD/JPY sensitive to any policy shifts.
• Current Outlook: Despite recent corrections, US yields remain elevated, supporting USD strength. The euro and yen require decisive policy action from the ECB and BoJ to reverse their downtrends.

Conclusion:

SocGen sees US bond yields keeping the dollar supported, while EUR and JPY recovery prospects depend on meaningful yield increases from the ECB and BoJ, which remain uncertain for now.