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USDJPY Soars and Nikkei 225 Steadies as Ukraine Fears Cool, Fed Rate Hike Nears

USDJPY Soars and Nikkei 225 Steadies as Ukraine Fears Cool, Fed Rate Hike Nears

Ilya Spivak,
What's on this page


  • US Dollar jumps to 5-year high vs. Yen on cooling Ukraine fears, Fed outlook
  • 25bps FOMC interest rate hike widely expected, all eyes on forward guidance
  • Breaking resistance in mid-118 area may see USD/JPY challenge 120 figure
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The US Dollar surged to a five-year high against the Japanese Yen. Prices idled in the first two months of the year, with USDJPY struggling net out the implications of a brewing central bank fight against increasingly acute inflation and that policy pivot’s influence on market-wide risk appetite.

On one hand, the Fed-led push to quickly withdraw pandemic-era stimulus widened interest rate differentials in the Greenback’s favor. On the other, it soured sentiment among investors that have grown used to generous monetary accommodation. That spoke to the Yen’s anti-risk appeal.

Russia’s invasion of Ukraine pulled down rate hike bets but also drove haven flows into both USD and JPY, keeping the range in place. Now, early hints at the possibility of productive ceasefire talks between Moscow and Kyiv have allowed for the parallel rebound in yield spreads and an upswell in risk appetite.

That Ukraine-related worries are abating (as expected) is seemingly revealed in the sharp narrowing of backwardation in front- and second-month WTI crude oil futures. Supply disruption risks at the war’s onset pushed it just north of US$4. It has now plunged back to a bit over US$1.

Meanwhile, the yield spread between benchmark US 10-year Treasuries and Japanese JGB equivalents has nearly hit 2 percent, jumping to the highest level since November 2019. Taken together, that has pushed the Yen sharply lower and helped Japan’s benchmark Nikkei 225 stock index find a near-term bottom.

USDJPY, Nikkei 225, US-Japan 10y yield spread, WTI crude oil futures spread

Chart created with TradingView

The spotlight is now on today’s fateful FOMC meeting, where Chair Powell and company will almost certainly lift the policy rate target by 25bps to a range of 0.0-0.25 percent. If this comes with an upward revision of inflation forecasts and the longer-term rates path, that may be seen as hawkish relative to baseline bets.

That alongside continued easing of Ukraine-related market stress might push USDJPY through resistance marked by the December 2016 high at 118.87, which may set the stage for a test above the 120.00 figure. Alternatively, a seemingly status-quo outcome may cap the rally and encourage consolidation.

If the latter comes with disappointment on de-escalation prospects in Eastern Europe or the Fed’s disposition is seen as so hawkish as to meaningfully spook investors now, renewed de-risking might pull USDJPY lower. Meaningful support begins in the 115.39-116.00 zone, but breaking 114.41 might be trend-altering.


--- Written by Ilya Spivak, Head of Greater Asia at

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter

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