Morning Deal: Dramatic Currency Swings in Japan, Bond Market Divergence

Japanese yen media event in Tokyo

A worker holds samples of the new Japanese yen banknotes at the Bank of Japan’s National Printing Office banknote factory during a media event on the new banknotes to be introduced in 2024, Tokyo, Japan, November 21, 2022. REUTERS/Kim Kyung-Hoon/ File Photo acquires licensing rights

Nov 1 (Reuters) – A look at the day ahead in Asian markets from financial markets columnist Jamie McGeever.

It’s shaping up to be another dramatic day in Asia on Wednesday, as investors digest huge moves in Japan’s government bond and currency markets and brace for a range of economic indicators from across the continent that could weigh on the market.

The U.S. Federal Reserve’s policy decision and detailed information from the U.S. Treasury outlining $776 billion in borrowing needs in the fourth quarter were the two major global events Wednesday night. However, the first chance for the Asian markets to react will be Thursday.

Before that, purchasing managers’ index reports for several countries including India, South Korea and Indonesia will be available, as well as Indonesian inflation, South Korea trade, Hong Kong retail sales and Australian residential property data.

Particular attention will be paid to the “unofficial” Caixin PMI report from China, a day after “official” PMI data showed factory activity unexpectedly fell in October. What’s more, it shrank faster than the most pessimistic forecasts in a Reuters poll predicted.

This calls into question the strength of China’s economic recovery. Economic surprises recently hit their highest levels since May, and stocks rose for five days in a row. On Tuesday, this streak was interrupted.

A dismal “official” PMI report would likely intensify downward pressure on stocks and the currency. The yuan is near a 16-year low in September and selling pressure on the overseas yuan in particular is intense.

However, if the yuan comes under pressure, it will be nothing compared to the attack the Japanese yen is facing. After the Bank of Japan lifted its 1% cap on 10-year government bond yields on Tuesday, the yen fell to a new one-year low against the dollar and a new 15-year low against the euro.

The currency and bond market reactions to the BOJ policy change could not have been more different, with the yen falling by the most since April, while Japanese bond yields rose to their highest level in the new decade.

This suggests that investors are unclear about the long-term implications or are not fully convinced by the BoJ’s actions. Or both.

Global and US stock exchanges ended the month with gains on Tuesday, volatility on Wall Street fell below long-term averages, the government bond market was relatively stable and oil prices fell by more than 1%. All this bodes well for the Asian market opening on Wednesday.

However, the beginning of the fourth quarter was disastrous. Global, US and Asian stock markets fell for the third month in a row, bond yields rose and financial conditions tightened significantly. Investors will be hoping for a moment of respite in November.

Here are the key developments that could give markets more direction on Wednesday:

– China PMI (Caixin, October)

– Indonesia CPI (October)

– Trade in South Korea (October)

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to the principles of integrity, independence and freedom from bias in accordance with the Trust Principles.

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Jamie McGeever has been a financial journalist since 1998, reporting from Brazil, Spain, New York, London and now back to the US. Focus on economics, central banks, policymakers and global markets – especially currencies and fixed income. Follow me on Twitter: @ReutersJamie

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