Bytes, Bonds and the Yen: The Big Picture In FX

PodcastStreet SignalsChris PizzottiOct 1

The guest linked rising U.S. long-term rates to eventual economic pressure, while noting that further hikes may be difficult to price in and that a resolution to the Iran war could ease near-term rate pressure. AI-related investment and cross-border equity flows have supported trading activity, while changing currency performance and rising hedging demand are shaping FX markets. He saw dollar-yen near the top of its range and warned that emerging-market currencies still carry volatility and tail risks.

Currencies Interest Rates Market Volatility

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Key Takeaways

U.S. 10-year and 30-year rates kept reaching new highs despite months of expectations that rates were near their peak, and the guest said the increases would eventually pressure the economy. He said falling oil after a resolution of the Iran war could ease near-term rate pressure, while 100 basis points of central-bank hikes already priced over the next year could make further increases harder to absorb; he also flagged long-end credibility or intervention risks amid significant rate repricing in the U.S., U.K., and Eurozone.

The guest linked AI-related investment and flows to activity in U.S. and global markets, including major names such as NVIDIA and SpaceX and chipmakers SK Hynix, Samsung, and TSMC. He said AI dominated flows into and out of Korea, Taiwan, and other markets, supporting banks' equity businesses, while Korean flows were concentrated in SK Hynix and Samsung and leveraged ETFs exacerbated volatility.

Cross-border equity flows generated related FX transactions that boosted volumes, and the guest said rising global asset prices also enlarge clients' currency-hedging and management flows, benefiting trading businesses. He expected volatility to begin creeping up in certain markets, similar to the preceding couple of years.

TECHNOLOGY

Bank Infrastructure — The guest said banks are investing in strong technology and infrastructure to avoid major technology, AI, and cybersecurity problems, reduce operational errors, and scale effectively.

“But I think, you know, ultimately, I want to avoid any major issues related to technology and AI and any cyber breaches, etcetera…”—

ECONOMY

Rising Long Rates — U.S. 10-year and 30-year rates continued to reach new highs, which the guest said would eventually pressure the economy. Expectations that rates were near their peak had persisted for months even as yields kept rising.

“I think most people are surprised that we haven't seen a downdraft in equities, especially if you look at what's happened in the ten year, the thirty year US interest…”—

Rate-Hike Limits — The guest said a resolution to the Iran war and a significant drop in oil could ease near-term rate pressure. He also said further hikes would be harder to price in when markets already had 100 basis points of central-bank increases priced over the next year, especially given uncertainty about which economies could absorb them.

“I think we're probably in the seventh and... Seventh or eighth inning in my view of this rates move because we've had such a significant move already…”—

MARKETS

AI Investment — The guest said the AI story and activity around major names, including NVIDIA and SpaceX, had helped drive investment in the U.S. and globally.

“So if you look at all the big names, the NVIDIA's, you know, and a lot of the…”—

Cross-Border Flows — The guest said AI had dominated flows into and out of Korea, Taiwan, and other global markets, supporting banks' equity businesses. FX transactions tied to cross-border equity flows had also boosted volumes.

“You know, if you look at, you know, that in that area and what's driven flows in and out of, you know, places like Korea, Taiwan, other global markets, that…”—

FX Hedging Demand — The guest said rising global asset prices expand clients' FX hedging and currency-management flows, benefiting trading businesses. He expected volatility to begin creeping up in certain markets, as it had in the preceding couple of years.

“If you look at asset prices globally, continuing to push higher hedges, you know, and management of FX that clients are executing those flows naturally become larger, which is good…”—

FORECASTS

Dollar-Yen Outlook — The guest viewed 165 as the top of the dollar-yen range and said a move above 160 would prompt significant discussion and rhetoric from the Bank of Japan and the U.S. about monitoring yen weakness. U.S. pressure for a weaker pair and Bank of Japan rate increases led him to believe the pair was near the top of its range. If U.S. rate expectations shifted lower while the Bank of Japan stayed on its trajectory, dollar-yen could make another leg lower.

“I would say that what's really different in my view this time around is The US involvement and how outspoken that Bessent has been about the level of dollar yen…”—

Street Signals And FX Themes

Tim Graff introduces the show and guest Chris Bessotti, framing a conversation about FX market drivers, current events, and the State Street business.

AI Flows And Trading Volumes

Bessotti says AI-related equity investment and cross-border flows have lifted FX volumes despite subdued broad volatility, with Korea and Taiwan seeing notable market swings.

Iran Conflict And Dollar Demand

The speakers discuss how the Iran conflict, elevated oil prices, and shifting Fed expectations have supported safe-haven demand for the dollar and affected rate pricing.

Fed Policy And Rate Pricing

Bessotti says the Fed's commitment to fighting inflation has reduced near-term political-pressure risk, while questions about the balance sheet and rate outlook remain.

Long-Term Yield Pressure

Bessotti warns that rising long-term yields across major markets merit close attention, even as equity markets have remained resilient and policymakers face difficult choices.

Dollar-Yen Near Range Highs

Bessotti sees dollar-yen near the top of its range, citing U.S. involvement and likely Bank of Japan hikes, with a possible move lower if U.S. rate expectations ease.

Emerging-Market Carry Risks

The speakers say low volatility has supported EM carry, but recent reversals and elevated volatility-of-volatility leave room for currency tail risks despite limited evidence of stretched positioning.

FX Technology And Client Service

Bessotti describes using AI, electronic trading, internalization, research, and broader client coverage to improve pricing, scale the FX franchise, and serve clients.

FX Business Growth Priorities

Bessotti outlines plans to expand electronic FX, add products, and use technology responsibly, while emphasizing risk controls, resilience, and avoiding areas outside the franchise's strengths.