CREDIT MACRO: Fallen Angels - Rising Stars

• Treasuries have pared gains seen in Asia hours to leave them broadly unchanged ahead of today’s FOMC-focused session, outperforming Gilts and EGBs.
• Cash yields range between unch to 0.5bps higher. 20s and 30s lead the increase with the long end possibly seeing some lethargy after yesterday’s 20Y auction tailed by 1.5bp, an auction that was better than November’s but certainly not better than most.
• TYH5 sits at 109-25 (-04) having kept to Tuesday’s range throughout, on particularly low volumes of 150k.
• A bear threat is still seen, with support at 109-17 (Dec 17 low) before potentially 109-04+ (equates to 4.50% yield). Both sit above a bear trigger at 109-02+ (Nov 15 low) although note that TYZ4 was trading as the active contract then. To the upside, resistance is seen at 110-17+ (20-day EMA), a break of which would highlight an early bullish development.
• Data: Weekly MBA data (0700ET), Housing starts/building permits Nov (0830ET), Current account Q3 (0830ET)
• Fed: FOMC decision/SEP (1400ET), Powell press conference (1430ET)
• Bill issuance: US Tsy to sell $64bn 17-week bills (1130ET)

USD/JPY vols are suitably bid today, with the overnight contract capturing both the Fed decision later today, as well as the BoJ due during the Thursday Asia-Pac session.

• It's clear that signalling at both the banks will be key for the market reaction: a 25bps FOMC cut, and a BoJ hold are close to fully priced - meaning it's the comms strategy for 2025 that could swing prices here, and that's likely what's showing in vol space.
• USD/JPY vols are bid to 25 points, and EUR/JPY to 23 points, meeting levels akin to the lead-up to the September US jobs report, and prompting the break-even on an overnight straddle to widen to ~130 pips - close to double the YTD average for the same structure.
• This raises the focus on layered resistance at the Y155 handle and the cycle highs above at 156.75 should the confluence of Fed/BoJ risks be beneficial for the pair. Such a move would work against the recent improvement in the JPY net position, which currently sits at a small net long after this year's sharp correction.
• It's January BoJ pricing that could prove key here - a 25bps hike is ~50% priced, leaving notable two-way risk on a firm steer in either direction from Ueda's press conference - which could make this the market to watch in the coming 24 hours.

• In FX, EURUSD is unchanged. The pair maintains a softer tone and recent gains appear to have been a correction. The 20-day EMA, at 1.0542, remains intact. A close above this average is required to signal scope for a stronger corrective recovery. This would expose 1.0660, the 50-day EMA. For bears, a resumption of the downleg would pave the way for a test of key support at 1.0335, the Nov 22 low and bear trigger.
• GBPUSD is trading above last week’s 1.2609 low (Dec 13). The primary trend direction remains down and recent gains appear to be corrective. Moving average studies are in a bear-mode position, highlighting a dominant downtrend. Key resistance to monitor is 1.2811, the Dec 6 high. A breach would highlight a reversal. Initial support lies at 1.2609, a break of this level would expose the bear trigger at 1.2487, the Nov 22 low.
• USDJPY remains firm and the pair is trading just below its recent highs. Price also remains above both the 20- and 50-day EMAs. The breach of these averages undermines the recent bearish theme and signals scope for an extension. Sights are on 154.84, 76.4% of the Nov 15 - Dec 3 pullback. A reversal lower would signal the end of the latest bull cycle and refocus attention on the bear trigger at 148.65, the Dec 3 low. Initial support to watch is 152.36, the 20-day EMA.