USD/JPY hits fresh 20-year highs

June 7, 2022

It’s been an interesting start to the week with the Reserve Bank of Australia surprising many with a half-point interest rate hike and the yen weakening again.

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.

Technically, the recent high in USD/JPY was 131.349 so this becomes support. The January 2002 high is the next key upside level at 135.15. After that the October 1998 top is 136.89.

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Prices have entered overbought territory, but this hasn’t stopped the major advancing further in the past.

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 which likely means more 50bp rate hikes in the coming months. 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.

But the market is very aggressively priced for rate hikes going forward as the RBA front-load and global growth risks next year may tilt towards a shorter RBA hiking cycle.

AUD is struggling this morning with sour risk sentiment. The 200-day and the 100-day simple moving averages have capped the upside so far, at 0.72563 and 0.7229. The Fib level (38.2%) of the April/May move comes in below at 0.7147.

Risk sentiment cautious

Traders in general appear to be in a watchful mood as they eye up the ECB meeting and latest US inflation data later on in the week.

Both European and US futures are in the red after a choppy session on Wall Street overnight.

The dollar is trying to break out of recent consolidation with a move to the upside.

US equities pared gains at the close with the S&P 500 closing 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%. Cyclical stocks outperformed defensives for the eighth time in the last nine sessions.

This essentially means the most oversold sectors are benefitting the most in the relief rally.

The blue-chip US equity benchmark, the S&P500, has been trading in a relatively narrow range over the last few days around the February low at 4105. After several weeks of wild swings, the broad S&P index ended May at almost exactly the same level it started.

Looking at various historical episodes, equities may not have found the trough yet, given headwinds of further aggressive monetary policy tightening from central banks, the risk related to the war in Ukraine which is clearly systemic, and commodity markets performing strongly.

This month’s low at 4073 is initial support. On the flip side, last week’s high in the S&P500 at 4177 is the near-term target for bulls. The Fib level (23.6%) of the March 2020 low/January 2022 high sits above here at 4198, with the 50-day simple moving average at 4227.