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Week in FX Asia – China Manufacturing Disappoints as Emerging Markets Drop

People’s Bank of China Injects Cash
The PoBC was forced to inject $62 billion to meet the extra demand of the Lunar New Year holiday. This was not an unforeseen move by the Central Bank as they did it as well last year. It becomes more relevant after statements from the Chinese Premier on the challenging road ahead for the country in 2014 and the disappointing early look at the purchasing managers index which dropped in the latest reading.

The main objective of the funding was to stabilize the market ahead of the holiday, but also to avoid a cash crunch from previous underfunding which international observers are saying its a far bigger issue that China is letting on.

Flash Purchasing Managers Index Drops to Contraction
The flash PMI release was the first time in six months that Chinese factory activity failed to expand. This is not the best start for the China and statements from policy makers warned the markets of more of the same in 2014. A weaker domestic demand coupled with the prolonged drop in foreign demand made the PMI drop below 50 to 49.6. This reading means the sector is contracting. Markets that are more deeply connected to China for growth suffered losses after the figure was released. Australia was particularly hard hit being China biggest supplier.

IMF Reduces Growth Expectation in Emerging Markets
Overall the IMF raised the growth expectations of major economies while undercutting the emerging markets. China was the standout with an upgrade by 0.3 percent to a growth forecast of 7.5% in 2014 followed by India with a 4.4% forecast. Russia and Brazil suffered cuts to their growth estimates with 2 and 2.3 percent expectations for this year. The fact that China factory output contracted in the first part of the year alongside the ever present US Federal Reserve tapering has hit emerging markets which this week had losses across the board.

China – Japan Feud Reaches Davos
Japanese Prime Minister Shinzo Abe took his bold style of politics to Davos, Switzerland this week. The first order of business was to reassure attendees that Japan was definitely back after Abenomics is starting to show results. Then he defended his visit to a controversial shrine which sparked outrage in China and South Korea. He said that the memorial does not only include participants of World War One, but also 1868 Meiji war and WWI and pays respect to all victims of war regardless of nationality. Abe then called out other Asian nations for building their military might which is wasteful in current economic conditions.

WEEK AHEAD

* GBP Gross Domestic Product
* USD Durable Goods Orders
* USD Consumer Confidence
* USD Fed QE3 Pace
* USD FOMC Rate Decision
* NZD Reserve Bank of New Zealand Rate Decision
* EUR German Unemployment Rate
* EUR German Consumer Price Index
* USD Gross Domestic Product
* USD Personal Consumption
* JPY National Consumer Price Index
* EUR Euro-Zone Consumer Price Index
* CAD Gross Domestic Product
* CNY Manufacturing PMI

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Alfonso Esparza

Alfonso Esparza [32]

Senior Currency Analyst at Market Pulse [33]
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza