JPY and EUR likely to remain supported by safe-haven demands

Yellen's speech yesterday proved only a short-lived relief, risk appetite disappeared quickly. The S&P500 future was 1.4% lower than at the European close. US bond yields dropped sharply, with the 2Y yield down 4bp to 69bp and the 10Y yield down 7bp to 1.67% - the lowest since January last year. The US yield curve is the flattest since 2007 - just ahead of the global financial crisis.

Markets remain extremely volatile, and both the JPY and EUR are likely to remain supported by safe-haven demands as long as market jitters continue. USD/JPY plunged further, prompting headaches for the BoJ and increasing speculation of intervention. USD/JPY is being hammered lower as we write, almost 250 pips down intraday. While EUR/USD hit highs of 1.1355, levels not seen since Oct 2015. Current market conditions as a potential challenge for both the ECB and BoJ mandates.

"We do not think the BoJ is about to abandon its policy and we therefore expect it to react sooner rather than later. Question is what the BoJ can do at this stage. Further negative interest rates and more QE are both likely, in our view but there has also been some speculation about currency intervention in the news media", said Danske Bank in a report.