Overnight Headlines

*Ukraine sets ceasefire goal for talks but US says Putin not ready to end war

*Japan’s yen on the ropes as BOJ defends 0.25% bond yield target

*Oil falls on China demand fears, Ukraine peace talk hopes

*Stocks markets cast aside fears of rising interest rates, US 10-year yield hits 2.5%

US equities rallied late in the session, reversing intraday losses. The VIX eased below 20 to its lowest level since mid-January. The “fear gauge” is down four out of the last five sessions. Consumer discretionary outperformed while the best three sectors on the year (energy, financials and materials) were the laggards. Asian markets are mostly higher in relatively quiet trade. Futures in Europe are solidly in the green, the US modestly positive.

USD continued to strengthen with the DXY adding 0.4% to 99.14. USD/JPY was the biggest mover resuming its volatile climb to new cycle highs. EUR traded in a moderate range dropping to 1.0944 before closing at 1.0982. GBP fell sharply to close at 1.3081 on cautious Bailey comments. USD/CAD spiked above 1.2590 before falling back near to 1.25. AUD ended lower and is consolidating around 0.75.

Market Thoughts – USD/JPY: “policy divergence on steroids”

The yen has been hit by triple whammy in recent weeks. Surging US bond yields, rampant global energy costs and now central bank intervention have seen massive selling in the Japanese currency. Yesterday the BoJ intervened in bond markets to cap yields going beyond 0.25%. This means the bank now has to accelerate QE at a time when others like the Fed are tightening policy.

USD/JPY was on track for one of the biggest daily rises in the last two decades after it touched 125.10. It’s been the worst month for the yen since 2016. Traders were on their guard for comments from the Ministry of Finance about “closely monitoring FX” or similar in case there was intervention in FX markets. This would have been the first time since 1998.

It is the speed rather than the level of yen depreciation which is key. At one stage the major had moved over three big figures in a matter of hours. Is 125 the top of the move? A prominent former official said it could be 130 yesterday morning. Of course, a weak yen is generally positive for the Japanese economy as a yen collapse boosts exporters. It’s worth watching US 10-year yields and the 2.50% level too.

Chart of the Day – USD/JPY rise and retrace

We could have chosen the cable fall as chart of the day. Prices broke down towards key support at 1.30 after Governor Bailey expressed caution amid a growth slowdown. But the yen has been the major talking point.

USD/JPY hit seven-year highs at 125.10 yesterday morning before pulling back strongly. Prices had actually retraced more than 50% of the move up on the day. Today’s top is now key resistance, ahead of the highest highs form 2015 at 125.27 and 125.85. Support is 121.68 and 119.79.