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.

• Bank of Japan Maintains Stimulus
• Bank of Japan Warns US Shutdown Will Hit Markets Hard
• China Boost in Gold Demand Might Slow Down Next Year
• Maintain Focus on Japan, despite U.S. Shutdown
• Business Confidence Rises and BOJ Holds off
• China Will Bring Growth Opportunity For South East Asia – Xi
• India To Cut Own Budget Aggressively To Avoid Credit Downgrade
• Asian Stocks Rise after China Services Jumped
• Reserve Bank of Australia’s Rate Cutting Cycle Close to Ending
• Abe Tax Hike and Lack of Stimulus Puts Bank of Japan in a Corner
• Asian Development Bank Confident Asia Can Ride Out Tapering Storm
• PM Abe Places Additional Pressure on BOJ
• Indian Gold Exports Continue Declining
• Japanese Business Confidence Rises in September
• US-China Trade Gap Costs $37 Billion in Lost Wages
• Japanese Government to raise National Sales Tax to 8%

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