Week in FX Asia – IMF’s Lagarde ” Transitions on an epic scale”

Asian risk rallies have run out of steam, ending this week with most Asian equity indexes and currencies trading down. Is the global economy and especially the emerging markets play out the IMF's Lagarde somewhat dire prediction?

Supposedly, the global economy is experiencing “transitions on an epic scale” and she warns that current turbulence in emerging markets could knock between +0.5% to +1% points off their growth. Most of this is based on this summer's market reaction to “taper talk”, and more importantly their vulnerability to future changes in the pattern of global capital flows.

Ever since Bernanke entertained the possibility of tightening the liquidity tap by paring back on the Fed's $85b a-month bond-purchasing program the markets have witnessed a massive outflow of capital at record speed – India has been one of the hardest hit from capital flight.

Lagarde's has indicated that the global economy's "immediate priority is to ride out the turbulence as smoothly as possible,” and that “currencies should be allowed to depreciate. Liquidity provision can help deal with dysfunctional market behavior. Looser monetary policy can also help.”

If capital flows to Emerging Markets continue to become scarcer, the market will be relying on signs that their economies can export their way out of any problems. EM export growth will need to rely on a number of factors – very cheap real exchange rates, plentiful credit availability in the Developed Markets and strong Chinese growth. A danger to their markets is closer at hand – Japan. Prime Minister Abe's recovery plan hinges on a cheap yen and export substitution may be of concern.

The Bank of Japan earlier this morning maintained its policy stance and its view that the Japanese economy is recovering moderately. A weaker currency has currently been put on hold due to the partial US government shutdown. Abe and the rest of the world requires a quicker resolution to the US budget impasse and ceiling debt other wise we will all be in that one boat with the leak.

WEEK AHEAD

* USD Unemployment Rate
* USD Change in Non-farm Payrolls
* USD Fed Releases Minutes from Sept 17-18 FOMC Meeting
* CNY New Yuan Loans
* AUD Employment Change
* GBP Bank of England Rate Decision
* EUR German Consumer Price Index
* USD Advance Retail Sales
* CAD Unemployment Rate
* USD U. of Michigan Confidence

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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Dean Popplewell

Dean Popplewell

Director of Currency Analysis and Research at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2007, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell