Overnight Headlines

*Australia’s central bank raises rates by 50bps in major surprise

*Weakened UK PM scrapes through after damaging confidence vote

*Japanese yen falls to 132 against the dollar, hitting a 20-year low

*Asian stocks mixed in choppy trade, amid Treasury slide

US equities pared gains at the close in another choppy session. The S&P500 closed 0.3% higher after advancing as much as 1.5% during the day. The Dow closed near sessions lows, eking out a 16-point gain. US-listed Chinese stocks helped the Nasdaq rise 0.4%. Cyclicals outperformed defensives for the eighth time in the last nine sessions. The most oversold sectors are benefitting the most in this relief rally. US Treasury yields jumped higher with the 10-year gaining for a fifth day. It crossed the 3% handle, while the 2-year yield hit the highest level in a month. Both European and US futures are lower.

USD is pushing higher this morning having gained against most of its peers on Monday. JPY extended declines to a 20-year low with USD/JPY surging 0.8% to 131.88 and then today near to 133. EUR traded back below 1.07 while GBP outperformed yesterday before giving up gains today. AUD spiked higher to 0.7247 after the RBA’s hike before pulling back below 0.72. CAD has enjoyed support from the recent rise in oil, but USD/CAD is trading above 1.26 this morning.

Event Takeaway – RBA surprises with bigger rate hike

The RBA raised the cash rate by 50bps overnight, fully unwinding the emergency cuts seen during the pandemic in 2020. The bank said the economy is resilient and inflation is expected to increase further before dropping back towards the 2-3% range next year. Policymakers expect to take further steps in the process of normalising monetary conditions over the months ahead. Future rate increases will be guided by inflation and labour market data.

The consensus view had been for a 40bp hike with the market pricing in 28bps before the meeting. This is slightly out of character for a central bank that has always seems to characterise itself as on the dovish side of the Fed. The market is very aggressively priced for rate hikes going forward. AUD is struggling this morning with sour risk sentiment. Global growth risks next year may tilt towards a shorter RBA hiking cycle.

Chart of the Day –USD/JPY hits 20-year highs

JPY pressure is intense at the moment. 10-year US Treasury yields have moved above 3% and oil is at $120 per barrel. As long as those yields are rushing higher, momentum is bullish in USD/JPY.  This only slows if the Bank of Japan is ready to climb down from its commitment to the yield-curve-control policy under which it caps the 10-year Japanese Government Bond yield at 0.25%. Elevated energy prices also do not help JPY as the country is a net energy importer. Verbal intervention may grow louder now, but the BoJ continues to view the weak yen as mainly positive.

The yen is now reached the weakest in seven years in nominal effective terms.  The high in USD/JPY was 131.34 so this becomes support. The January 2002 high is the next key upside level at 135.16. After that the October 1998 top is 136.89. Prices have entered overbought territory, but this hasn’t stopped the major in the past.