Week in FX Asia – After Swiss Shock All Eyes on China and ECB

• USD/JPY trading at 117.48 level
• China GDP to be released next week
• Japan Approves Record 96.34 Trillion Yen Budget

The events of this week will continue to resonate through the markets for months. The unexpected and hard to justify decision from the Swiss National Bank left the market scrambling for answers. Uncertainty drove volatility and investors flocked to safe haven assets. The USD and JPY were the main beneficiaries.

The USD/JPY continued to retreat as the Yen appreciated. Support levels continue to be breached and could trade next week below 115 if global conditions worsen as central banks and the China GDP data take the stage. The Bank of Japan issued a statement saying the economy is recovering at a moderate pace. Economic data has pointed to a lower JPY, but macro developments and expectations continue to drive the USD/JPY lower as the Fed’s timeline for an interest rate hike keeps being pushed back and the Japanese stimulus fails to convince consumers to start a virtuous cycle of growth.

China figures released this week were net positive as the stock market continues to roar ahead and economists expecting further stimulus announcement from the Chinese government to boost lending. Chinese gross domestic product to be announced next week will bring this data into perspective as the country’s slowdown is one of the main risks affecting global growth. A surprise to the upside could boost commodities and partner nations such as Australia, but a lower than expected figure could further set back the health of the global economy. The World Bank cut its forecast for global growth to 3 percent, down from an earlier 3.4 percent forecast. Turning to China the World Bank is forecasting 7.1% in 2015 and what likes like an optimistic 7.4 percent for 2014. The final GDP for the fourth quarter will be published next week.

The Japanese government approved a 96.34 trillion yen ($812.45 billion) budget this week. The budget will increase spending on welfare and military spending but with a goal of higher tax revenue. Fiscal health is at the heart of Abenomics and the reason behind the sales tax hike in April of 2014 which in the eyes of many derailed the gains from the first arrow driven by the Bank of Japan. In order to retain a good rating on its debt Japan needed to address the fall in tax revenue with the announced delay of a new round of sales tax increases.

Next Week For Asia:

The Chinese fourth quarter growth data will accelerate the pace of releases on Monday. Forecasts are varied, but the market expects further slowdown from previous quarters as government action has been effective only in smoothing the rate of decline, but haven’t managed to reverse the trend. Commodities will be heavily linked to the final GDP figures as unsold inventories continue to accrue as demand shrinks.

How times have changed. After the crisis of 2008 central banks were commended for working in unison to avoid further global turmoil. After the United States’s Federal Reserve announced its plans to taper its bond-buying program it marked an end to the era of monetary policy coordination. Forward guidance entered the market’s everyday lexicon as central bankers could telegraph their intentions to boost economic growth. Compared to then, the new normal is based on unexpected or contradictory actions.

The Bank of Japan had a timely date for their market shock on October 31, 2014. Announcing an increase in its stimulus program, that while expected given the precarious state of the Japanese economy had been denied previously by governor Kuroda. The Swiss National Bank shook the market this week with an unexpected end to the CHF peg to the EUR at 1.20 that lasted three and a half years. That strategy proved ineffective and had the potential to be even costlier if allowed to carry over into next week, where the European Central Bank (ECB) is on line to announce a quantitative program to boost the Eurozone out of recession.

The ECB announcement next week will be the highlight on what already priced in to be a major week in trading. The ironic twist is the the SNB probably chose this week to release their shock decision because of the lack of noise from other central banks. The result was that without anything else going on the news was magnified and could have overshot the central bank’s intention. Mario Draghi will have the tough task of delivering on very high expectations from the market. The big question mark hangs not on QE, but on what type of QE will be announced as there is still deep divisions within the European Union on what should be done.

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