Week in FX Asia – Yields and Geopolitical Tensions Hit Asian Markets

• USD/JPY Trades close to 104 After Strong US Data
• Japanese consumer inflation stays put
• India growth surprises boosts Modi’s credibility

Japan’s consumer inflation was steady at 3.3% with a real 1.3% figure which is below the Bank of Japan and Prime Minister Shinzo Abe’s target but overall positive given the two decades of Japanese deflation. The government faces a tough balancing act. How to spur inflation after two decades, while at the same time have a way to slow it down and avoid falling prey to hyperinflation.

Geopolitical and macroeconomic events from Europe and America have further complicated the follow through of Abenomics. The USD/JPY will have a positive August given the strong US Economic data and optimism about a rate hike probably next year. The Yen started the month at 102.90 versus the dollar but managed to break through both the 103 and 104 price levels. Safe haven flows have limited the upside of the currency. A weaker JPY has boosted the local stock market as it gives corporates higher revenues from their exports.

Indian gross domestic product rose 5.7% in the second quarter. The first quarter the economy had risen 4.6%. This has given new Prime Minister Modi’s government a boost of confidence. After a disappointing budget where more reforms and a bolder direction were missing, Indian growth seems to be on track to break away from the 4.4% range it has been stuck for the last couple of years.

Those results are not the work of his government as he only took office in May, but it leaves a positive foundation of what he can build going forward. India is looking like the best of the BRICs after Brazil has just entered a recession, Russia is immersed in a potential armed conflict and China had a disappointing manufacturing release.

The USD/INR depreciated with the positive Indian economic releases and is now trading below 61.00 which is far from the 58 price levels that it had reached at the end of May following the elections. Given current geopolitical tensions around the world and the expectation of central bank action in both sides of the Atlantic, the Rupee has been resilient but is is till exposed to outside forces.

Next Week For Asia:
Western central banks are on deck next week and given the current state of macro economic affairs the European Central Bank will face pressure to act to prevent further stagnation. In Asia the Reserve Bank of Australia will issue its decision rate with no changes expected to its benchmark 2.5% interest rate. Australia’s GDP will be released on Wednesday with an expectation of lower growth than in the first quarter (3.5%) with Q2 coming in at 3% given the employment headwinds the Australian economy is facing.

The release of Japan’s Capital spending figures will show how much is corporate Japan really pitching in towards recovery with longer term investments.
The China services PMI for August will validate the Flash PMI numbers which point to a slowdown of Chinese manufacturing.

European bond yields dictated the agenda this week. A commitment from the ECB has driven bond prices higher as yields have hit rock bottom. This has made investors seek higher yields elsewhere affecting forex currency flows. Next week the spotlight will shift to central banks as the Reserve Bank of Australia, the Bank of England, the Bank of Canada and the European Central Bank will issue rate decisions. The ECB is expected to come up with something more substantial than the latest rhetoric, but this week’s European inflation numbers might have given them a reprieve.

ECB President Mario Draghi cannot turn the EU ship alone and needs the help form individual nations, and in particular highly influential ones like Germany. That is the point where traders are uncertain. France is rejecting austerity while Germany continues to embrace it pointing at Greece as an example it works.

To finish the week the US Non-farm payrolls figures will be released on Friday. The US employment recovery has given the market clear expectations of a rate hike sooner rather than later. How soon is the million dollar question. The Fed’s QE program will end this fall and this Friday’s NFP numbers could give clarity on a potential timeline for the US first interest rate hike.

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