Week in FX Asia – China Risks Rise As Data Softens

• Chinese Trade pact gets support from APEC members
• China’s Inflation slowest in five years
• Corporate Japan wants second tax hike delay

Economic figures out of China this week under performed putting into question the now lofty goal of achieving 7.5% GDP growth in 2014. Industrial production and retail sales missed expectations even though they posted growth but the final number was below forecasts. The reason for concern from internationals investors is that this is the second weakest pace since the credit crisis of 2008.

Last weekend Chinese President Xi Jiping said that the risks facing the economy are not that scary and its confident the dangers can be dealt with. Long term investors are not so sure and in particular American companies have begun to scale back in long term investment. This might be one of the reasons why Xi made an effort to make peace with Japanese Prime Minister Shinzo Abe. The China-Japan relationship has been strained since the Senkaku Islands dispute. Both economies have benefited from a symbiotic relationship that was disrupted as protestors boycotted Japanese products in an act of nationalism. Japanese exports to China have not recovered and is one of the main reasons the Abe government wants to be part of the Trans Pacific Pact (TPP).

The flipside is that China was pushing its own trade pact at the APEC. The Free Trade Area of the Asia-Pacific (FTAAP) during the APEC meeting in Beijing. China is looking to expand its reach and avoid a slowdown. Leaders have tried reassuring the market that there won’t be a hard landing but more actions from the central bank and deep reforms are needed to believe those arguments.

The Japanese yen USD/JPY trades in the mid–115 range. On the release front, Japanese Core Machinery Orders posted a strong gain of 2.9%. Japanese manufacturing data has looked sharp this week. Core Machinery Orders gained 2.7%, crushing the estimate of –1.0%. Revised Industrial Production posted a gain of 2.9%, bouncing back after a decline of –1.9%. The estimate stood at 2.7%. Earlier in the week, Tertiary Industry Activity gained 1.0%, its best showing since April.

Indicators are gaining traction in Japan so it’s no surprise that Corporations that participated in a poll would much rather prefer a delay to the second phase of the sales tax. The first phase was launched in April of this year and is mostly to blame for the loss of momentum of the Japanese economy. The Bank of Japan had to push forward more stimulus on Halloween day in order to avoid an inflation and growth reversal. The JPY and the Nikkei have risen on the back of rumours the government has decided to wait.

Next Week For Asia:

On Sunday, the Kiwi’s get things underway with retail sales; in pursuit will be Japanese trade numbers. Central Bank speakers again will dominate the week, starting on Monday with ECB’s Draghi, followed by the RBA’s Governor Stevens with his MP minutes. Tuesday, the BoJ delivers its monetary policy statement and follows it up with a press conference.

The BoE (MPC rate and AP vote) and the FOMC minutes dominate Wednesday. EUR flash manufacturing and inflation numbers occupy Thursday, while Friday rounds off the week with ECB’s Draghi due to speak at the 24th European Banking Congress “Reshaping Europe,” in Frankfurt.

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