A coupled ocean–atmosphere dynamical ensemble prediction system is used to study coupled initialization and bred cyclic modes in the case of Tropical Cyclone (TC) Yasi. Ocean initial perturbations are constructed to identify the fastest-growing nonlinear modes in the ocean response to the TC. The ensemble provides a characterization of how initial and evolving dynamical ocean perturbations influence the coupled system through surface fluxes under extreme conditions. Results show how sea-surface temperature perturbations project into atmospheric perturbations of pressure and moisture content within the storm environment. By calculating the local bred vector dimension for ocean-surface velocity, we show that a low-dimensional subspace forms along the track of TC Yasi. The iterative approach to coupled initialization used in this study generates cyclic modes that are embedded on to the dynamics of regions critical to the coupled ocean–atmosphere TC dynamics. The ensemble mean forecasted sea-surface temperature and sea-surface height associated with the ocean response is in better agreement with observations, despite the biases the coupled model inherits from its component models. Both model and observations reveal a twin cold core structure in the ocean wake of TC Yasi.