Potential BOJ Adjustment to Monetary Policy Fueling Volatility in Debt, Forex Markets

The major Asian stock indexes are moving higher early Tuesday, but traders are expressing concerns over rising bond yields and the falling Chinese Yuan.

At 0342, the Japanese Nikkei is trading 22534.03, up 137.04 or +0.61%. The South Korean Kospi Index is at 2277.54, up 8.23 or +0.36%. In Australia, the S&P/ASX 200 Index is moving up 40.50, or +0.65% at 6267.00 and China’s Shanghai Index is trading higher by 44.39, up 1.55% at 2903.93.

Most of the indexes reversed losses from Monday on the back of a mixed performance on Wall Street. The highlight of the session was the jump in Google parent Alphabet after the company reported expectations-topping second-quarter earnings and revenue on Monday.

Ahead of Tuesday’s session, more than 17 percent of S&P 500 companies have reported earnings for the previous quarter, with 82 percent of those topping expectations, according to FactSet.

U.S. Treasury Markets

U.S. Treasury yields rose on Monday in reaction to a major swing in Japanese interest rates. The yield on the Japanese 10-year note jumped more than 4 basis points Monday to its highest level since February following reports that the Bank of Japan could adjust its monetary policy to make the program more sustainable.

The yield on the U.S. benchmark 10-year Treasury note tracked the move in Japanese yields, rising 7 basis points to 2.96 percent, while the yield on the 30-year Treasury bond moved up to 3.094 percent.

The price action in both the Japanese and U.S. debt markets was fueled by sources who told Reuters that the BOJ is holding preliminary talks on making changes to its interest-rate targeting and stock-buying techniques.

Although BOJ officials made it clear that this wasn’t a tightening move, the debt markets did not respond that way.

Forex

The U.S. Dollar is trading flat to lower against a basket of currencies early Tuesday, following a solid technical reversal bottom the previous session.

The Greenback traded sharply lower against the Japanese Yen early in the session on Monday as Japanese exporters aggressively bought the currency. However, a surge in U.S. Treasury yields to a five-week high made the U.S. Dollar a more attractive investment, leading to the potentially bullish reversal bottom in the USD/JPY.

Some of the early rally by the Yen was driven by Japanese exporters who converted their foreign earnings into the local currency. This was a typical end of the month move. However, the bulk of the rally was ignited by a report that the Bank of Japan was debating moves to scale back its massive monetary stimulus.