All three would argue for the decline in rates to be led by breakevens leaving a real rate short with little downside (real rates moved higher by 50bp post China deval in Aug-15). Trade: We recommend selling 10y real rates at 35bp with a target of 1% and a stop loss of Obp. Risk: A reflationary sell-off without re-pricing the Fed is a risk to the trade. FX: GOP sweep emboldens core USD/JPY view Higher US real rates, higher intermediate (5-10y) nominal rates combined with a potential USD tailwind from a second Homeland Investment Act (HIA), leave USD/JPY as our top directional FX trade for 2017. We have maintained a core view that USD/JPY would move higher in 2017, as the factors weighing on the pair this year, namely speculative JPY buying and increased FX hedging by domestic investors (S/¥’s eventual surge), would subside. We like the trade for the following reasons. « USD/JPY most sensitive to fiscal-stimulus-driven rise in US yields: Of all G10 FX pairs, JPY is most vulnerable (versus the USD) to a fiscal-driven rise in US yields. First, the pair’s correlation with rate differentials is the highest in G10 at 60%. But, more importantly, USD/JPY is also the most sensitive to the shape of the US 2s10s curve (Chart 18). The shift from loose monetary/tight fiscal to a tight monetary/ loose fiscal policy regime will support such a steepening as supply is concentrated in the intermediate part of the curve, and the positive growth shock allows the Fed to hike faster, supporting an increase in real yields, also a key 2017 call. ¢ BO) yield target is bearish for JPY: The BOJ’s implementation of a yield target at its September meeting has caused a break in the correlation between 10Y JGBs and USTs (Chart 19). First, given USD/JPY’s significant correlation with 10Y yield differentials (>60%}, the anchoring of 10Y yields will further weigh on the Yen as US Treasury yields rise. Second, further Japanese fiscal stimulus will successfully lower real yields through higher breakev