Overnight Headlines

*Japan’s Q1 GDP revised up to 0.5% annualised contraction

*Yen tumble continues as weakness spreads beyond the dollar

*Oil prices inch higher ahead of US inventories data

*China tech shares rally as game approvals give nod to recovery

US equities rose for a second straight session as the main indices gained between 0.8% and 1%. Broad-based buying in the last hour of trade saw closes near session highs. This came even after US retailer, Target, slashed its profit outlook for the second time in weeks The energy sector was the best performer as oil prices ticked higher. The 10-year US Treasury yield fell for the first time in six sessions. It is currently trading around the 3% mark. Asian markets are in the green, led by Hang Seng gains of nearly 2%. Futures are pointing to a lower open.

USD eased overnight in a relatively narrow range day of trading. EUR continues to trade around its 50-day SMA, above and below 1.07 ahead of tomorrow’s crucial ECB meeting. GBP pushed higher to the top of the recent range below 1.26. UK PM Johnson survived a no-confidence vote but the opposition against him was larger than expected. Commodity currencies were the best performers as stocks reversed earlier weakness. AUD outperformed after the bigger-than-expected rate hike. USD/CAD looks to be falling again to new cycle lows.

Market Thoughts – Yen depreciation in full effect

The big winners in the FX space this year have been those betting against the Japanese yen. JPY is down over 13.5% against the dollar. GBP is the next worst performing major, down just over 7%. Japan has spent the year doubling down on its efforts to fight deflation. The rest of the world has declared war on inflation and is generally front-loading rate hikes. This has pushed up their bond yields to new cycle highs. Inevitably, this has led to a collapse in the yen and the multi-decade low versus the greenback.

The US 10-year yield, unlike most if its peers, has yet to post a new multi-year high above 3.25%. If it does so, the pressure on the yen will be intense. Will this force the Bank of Japan to back down from its yield-capping policy? We should expect verbal intervention to ratchet up before this. But history tells us actual intervention is rare and is not dependent on the BoJ. Indeed, they view a weak yen as mainly positive for the economy.

Chart of the Day –GBP/JPY nears recent highs

We could have picked any yen cross to highlight its weakness. Most have made multi-year highs with the major leading those gains. It has moved from 127 to 133 in roughly two weeks. But GBP/JPY has been the relative laggard, as it approaches highs made in April.

That said, the pair is on its eleventh straight day of gains. The April spike high is 168.43 and there is resistance just below here. Upside targets above include the January 2014 high at 174.84. Support is this year’s March high at 164.65.