Fed Likely to Shift Benchmark, BOJ Unlikely to Shift

Talk continues to swirl about the Fed shifting to reverse repos as its benchmark rate, we look at what it means. On Tuesday, the yen was the top performer while the Australian dollar lagged. The BOJ decision and Japanese trade balance are up later.

The short-term money market is its own beast but what happens there often spills over to other markets. On Monday, WSJ Fedwatcher Hilsenrath mused about the Fed abandoning Fed funds as it benchmark rate when it begins to hike because it could cause a squeeze as the ocean of Fed-inspired liquidity is tightened.

A CNBC reporter said today that sources indicate a shift to a reverse repo rate is coming. In some ways the move is inconsequential because it will continue to anchor rates but if you were expecting a rise in Fed funds then it's dovish because it avoids some of the potential problems.

It also shows that the Fed is hyper-sensitive to strain in money markets and wants to keep money flowing as easy as possible. More details might be forthcoming in Wednesday's FOMC minutes.

The Fed's Dudley was a highlight on the speaker schedule and said he sees a 'relatively slow' pace of tightening when rates rise.The move comes as junk bond yields trade near record lows and central bankers around the world ramp up warnings about investors reaching for yield.

Markets remain skittish as the S&P 500 flirted with the 55-day moving average and 10-year yields touched 2.50%. Yen crosses were the main losers especially AUD/JPY and CAD/JPY – two of the most risk-sensitive trades.

Up next is the BOJ decision. No moves on rates or QE are expected and most analysts don't see any action until September so market moves are unlikely. We'll look to Kuroda for more hints. The decision is generally between 0230 GMT and 0400 GMT.

Japanese trade balance and Australia's wage cost index are other highlights.