Week in FX Asia – JPY Back to Fundamentals

• Japanese trade balance deficit increases to 1.07 Trillion


• Bank of Japan says gradual JPY slide good for economy


• China’s PMI rises but growth doubt persists

Japan’s trade deficit increased despite a positive growth in exports that could not overcome the rise in imports. A weaker currency gave exporters a boost but also made imports more expensive. Even with lower energy prices the growth in imports increased the deficit.

The USD/JPY broke through the 108 price level as safe haven flows have been reduced on the back of stronger US economic data and geopolitical turmoil easing. Inflation data in Japan and the FOMC could further weaken the JPY, which is something the central bank endorses if it’s a gradual shift. Rate divergence regains priority after investors look at the fundamentals.

On Monday, BoJ Governor Haruhiko Kuroda stated that Japan’s economy continues to improve modestly, although consumer demand has lessened since the consumption tax hike in April. The BoJ would prefer to stay on the sidelines, but there has been talk that the central bank could step in with additional stimulus if the economy takes a turn for the worse. Such a move would weigh on the already weak Japanese yen.

The flash Purchasing Managers Index (PMI) in China beat expectations as it rose above its September reading 50.2 to 50.4. The preliminary data points to the resilience of the world’s second largest economy as labor market and export demand remain strong despite other economic pressures.

Next Week For Asia:

Next week two central banks in the region will issue a rate statement: Bank of Japan and the Reserve Bank of New Zealand. There is no changes forecasted by either central bank as all eyes will be on the US Fed and their rate decision but more importantly the statement that could give a hint for future monetary policy.

This week will kick off on Sunday as the European Central Bank (ECB) will release the results from the Bank Stress Test results. Reports emerged today that as many as 25 banks will fail the tests. Earlier articles singled out 11 banks. The ECB has declined to comment until the actual test results are released.

The biggest event next week will be the US Fed’s Federal Open Market Committee (FOMC) interest rate decision on Wednesday. There are no rate change expectations, but there is a lot of anticipation as this will mark the final bond-buying cycle as the Fed positions itself to raise rates in 2015.

The final USD Gross Domestic Product figure will be reported on Thursday. The expectation is for a drop in the rate from the impressive Q2, but still a strong 3.0%. The trends that emerge after the FOMC will be validated or netted versus the US Economy’s GDP final number in the third quarter.

Later in the week inflation becomes a major trend to watch as the German Consumer Price Index, Japan’s National Consumer Price Index and the Euro-Zone Consumer Price Index Estimate are released in the final two days of the week.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* USD Durable Goods Orders

* USD Consumer Confidence

* USD Federal Open Market Committee Rate Decision

* NZD Reserve Bank of New Zealand Rate Decision

* EUR German Unemployment Rate

* USD Gross Domestic Product

* EUR German Consumer Price Index

* JPY National Consumer Price Index

* EUR Euro-Zone Consumer Price Index Estimate

* CAD Gross Domestic Product

* CNY Manufacturing PMI

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Week in FX Asia – USD/JPY Flirting with 110 as NFP Boosts Dollar

• BoJ and Abe say weak yen a positive


• USD/JPY tests 110 awaits policy meeting next week


• Hong Kong unrest and weak Chinese PMIs

Japanese Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda both tried to calm local concerns that the Yen slide is happening too fast. The USD/JPY is close to breaking the 110 price level. The PM Abe addressed councillors in the Japanese Diet and he told them that a virtuous economic cycle is about to begin. BOJ’s Kuroda for his part tried to reassure investors by saying the weakness of the currency is positive if it truly reflects fundamentals. Kuroda told the parliament that a weak yen is good for exporters but the imports have to be managed. He considers the net effect positive.

The duo of Japanese leaders are facing criticism for lack of definitive action in 2014. Last year was an achievement of economic policy for Japan so much, that its movement is named after its architect. Abenomics has so far failed to gain any traction in 2014 and its is only because of interest and growth rate differentials that the JPY has moved to this level desirable by exporters.

USD/JPY tests 110 awaits policy meeting next week

The USD/JPY was able to break above 110, but retreated currently trading at 109.79 after strong employment numbers out of the United States. Next week’s release of the minutes by the Federal Reserve and the Bank of Japan’s Monetary Policy statement on Monday could further fuel the USD rally.

Hong Kong unrest and weak Chinese PMIs

Hong Kong political unrest in a very civilized and tech savvy manner have proven difficult for the Chinese government to deal with. The two system rule is facing a tough test and will determine how China deals with public protest and difference of opinion in a well connected world. Asian markets were hit as protests and political uncertainty are not alien to the region, given the coups this year. What provided a change was the fact that HK was one of the shining examples of capitalism around the world, but yet under communist rule after the handover in 1997. Now China has the opportunity to have a smart protest movement inside a repressive government. No doubt Chinese leaders are anxious as they are not used to dealing with this kind of protestors but must do so in the same civilized manner if they intend to write a new page of Chinese history instead of going back to using antiquated methods.

Economic growth forecasts continue to shrink after manufacturing PMIs continue to weaken. This week even service PMIs came in lower but still well above the 50 expansion reading, the service PMIs fell to 54.0 from an earlier print of 54.4. The real estate sector is contracting after falling below 50. This was a disappointment after what is traditionally the best month for real estate September did not live up to expectations.

Next Week For Asia:

The market is not done yet with the central banks. Next week the Reserve Bank of Australia kicks things off on Monday. Despite an AUD rally of late (AUD$ 0.8670), the market will be expecting some dovish currency comments from Governor Glenn Stevens. It has become a regular part of his rhetoric repertoire.

On Tuesday, the Bank of Japan takes center stage; in all respects Prime Minister Shinzo Abe is happy with the yen’s relative weakness of late. Wednesday will be dominated by the Federal Open Market Committee minutes. As per usual, the market will be looking for any clues to justify building on current positions. The Bank of England meeting dominates Thursday: Is Governor Mark Carney still the favourite to be the first developed nation to hike interest rates? Finally on Friday, Canada will report its own jobs report.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* AUD Reserve Bank of Australia Rate Decision

* CHF Consumer Price Index (YoY)

* GBP NIESR Gross Domestic Product Estimate

* USD Fed Releases Minutes from Sept. 16-17 FOMC Meeting

* AUD Employment Change

* EUR ECB Publishes Monthly Report

* GBP Bank of England Rate Decision

* CNY New Yuan Loans

* CAD Unemployment Rate

MarketPulse

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Week in FX Asia – China and Japan Look to Governments to Stimulate Economy

• Japanese pensions hold key to Abenomics


• USD/JPY breaks through 109 aiming for 110


• China PMI slightly higher just above expansion

USD/JPY continues to climb towards 110

The comments from the Minister of Health regarding the country’s Pension Fund gave some strength to the JPY in a week that otherwise was USD positive. The new comments that closed the week regarding changes to the pension fund’s mandate and asset allocation weakened the currency.

The USD/JPY has gained 4.9% in September. The strength of the US economy has pushed the USD higher against all major currencies. In contrast the Japanese economy continues to struggle to get back on a growth track. The ghost of the April sales tax continues to plague the economy. The USD/JPY pair started the month at 104 and has steadily climbed to 109. Next week’s US Non-farm payrolls could further consolidate USD strength and break the 110 level.

Japan’s Government Pension Investment Fund

It is a known fact that the Japanese hold a very high savings rate. The Yen has benefited from local demand, even when rates were not attractive to foreign investors. Another well known fact is the age makeup of modern Japan. Retirees and the elderly are a big part of the inverted pyramid of Japanese demographics. What has not been common knowledge until now is how important to the strength of the Yen is the Pension plans or in this case the $ 1.2 trillion Public Pension Reserve.

The government wants to allow the pension fund to seek higher returns elsewhere. Currently it holds more than 50% in local bonds. Comments from the Health and Welfere Minister, to which the pension fund reports earlier in the week pointed to a slow and steady change. The markets saw it as a sign of Yen support. Friday the Welfare Minister made comments that changes to the pension fund could be made without new legislation.

Shinzo Abe’s government want the GPIF to buy less local bonds for two reasons: Ensure JPY weakness to give exporters a competitive edge. Boost the stock market rally that is slowing down.

Market participants are closely following any developments as a new arrow for Abenomics could be leaving the quiver.

China PMI a hair above expansion reading

The HSBC Flash Manufacturing PMI was released earlier this week. The reading of 50.5 was slightly above expectations and the previous reading of 50.2. This is just a hair above expansion which will not be comforting to the Chinese government as it is not a sign of accelerating growth. The government announced last week that it will inject $ 81 billion into the 5 largest banks to spur lending. This move was criticized by analysts as there were better alternatives that would have met the targets if the government had not focused only on state-owned banks.

Next Week For Asia:

The ECB is set to take the stage next week. German numbers continue to be solid when compared to the rest of Europe. The fact is that Germany is not immune economic woes and the sentiment polls have shown there is lack of confidence from business and consumers alike. Mario Draghi and company have the difficult task of convincing the market with words as there will be little change in actual actions.

Friday’s Non-farm payrolls in the US will help or hurt the case of a faster rate hike. Federal Reserve members have spent all week contradicting their forecasts in the media, which has left a lot of uncertainty on the timeline on when the Fed will hike rates. Currently the majority of analyst are envisioning a Q2 rate hike at the earliest. A good employment number might bring that a little close to the present.

Wednesday the Chinese NBS Manufacturing PMI data will be released. The Flash PMI from HSBC has already prepared the market for a number very close to forecast and previous reading. China is not growing at the pace the market or their own government needs.

Australian Trade Balance will be published on Thursday and Asia will close the week with the release of the China Non-Manufacturing PMI on Friday.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* EUR German Consumer Price Index

* EUR German Unemployment Change

* EUR Euro-Zone Consumer Price Index Estimate

* CAD Gross Domestic Product

* USD Consumer Confidence

* CNY Manufacturing PMI

* USD ISM Manufacturing

* EUR European Central Bank Rate Decision

* USD Change in Non-farm Payrolls

* USD ISM Non-Manufacturing Composite

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Week in FX Asia – The Good, the Bad and the Ugly of a Weaker JPY

• Japanese Government downgrades assessment of the economy


• JPY Breaks 109 barrier versus dollar on Fed Statement


• Nikkei rises to record high boosted by weaker Yen

A weaker JPY can be a bane and a blessing to Japan. It does have benefits for exporters, which can increase their earnings. The stock market has captured that sentiment as the stock market keeps rising. A weak currency in the long term can also bring about a higher cost of imports. For an island nation that depends on energy and food imports that could lead to higher prices not driven by consumers, therefore not positive to growth.

There is a good, a bad and an ugly side to the weaker JPY:

The Good

Tokyo stocks ended the week near a 7 year high. The weaker Yen ended around 109 boosted by the strong rally of the USD after the FOMC. Exporters had a great day as they gain a competitive edge due to the weaker currency. Auto, machinery and precision instruments were pushed higher. There were sectors that depended on imports that were the biggest losers of the session. Household wealth has risen due to gains in the stock market and land prices.

The Bad

Japan’s economic assessment was downgraded by the government. It is the first time in five months that the monthly economic report included the words “moderate recovery” to describe the Japanese economy. Consumer spending has been hard hit by the newly introduced sales tax hike in April. While a good move for the fiscal health of the country, it appears to have sapped all the momentum regarding consumer demand.

The Ugly

At face value the weaker Yen might be a boon for Abenomics. The fact is that the inflation target of 2% might be reached, but its not the right kind of inflation. Shinzo Abe plan was to have higher demand to would set Japan back on the growth path. Instead there are rising costs due to imports. Energy and food in particular that could have an adverse effect as people consume even less as wages do not keep up with inflating prices.

Next Week For Asia:

The US Federal Reserve FOMC meeting captured the market’s attention last week. In the end everything came in as expected. The Fed will end the tapering program in October, which makes the timing of the first rate hike a bigger possibility. Janet Yellen made her best to both reassure the market it is coming, but to calm investor’s nerves by telling them it is not going to be in the immediate future. There are still factors of the economy that haven’t recovered to pre-crisis levels.

The Scottish referendum was the other major event this week that jilted trader’s nerves. A month ago the Yes Vote did not seem like a legitimate treat to the United Kingdom, but a strong social media campaign and some backfire from scare tactics from the No vote made the turn out closer than originally expected. A 55% win has calmed stock markets around the globe and they are picking off where they left off.

Next week will not have events with such a significant impact in the currency markets. Two events in Asia are worth focusing on. The Chinese flash PMI complied by HSBC will be released on Monday. The previous reading was disappointing after it barely registered above expansion at 50.3 missing the forecast. It proved to be part of a slow down trend in China. The Chinese government has injected $ 81 Billion to the biggest state-owned banks to boost growth. A weaker PMI might justify that decision.

The Reserve Bank of Australia’s Governor Glenn Stevens will address the Melbourne Economic Forum. Australian employment has improved beating expectations in the September 10 release. The record numbers will give Stevens some cushion after the Australian economy’s growth was questioned. It will be interesting to watch what the Governor has to say about the surprising positive indicator on Wednesday.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* EUR ECB President Draghi’s Speech

* CNY China Flash PMI

* EUR French Flash PMI

* EUR German Flash PMI

* EUR German Ifo Business Climate

* AUD RBA Governor Speaks

* USD US Durable Goods Orders (Aug)

* USD US Gross Domestic Product Annualized

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Week in FX Asia – Japan’s Sales Tax Headache to Force BOJ Intervention

• USD/JPY Rises to above 107 on strong dollar


• Kuroda and Abe discuss BOJ further stimulus


• Australian Dollar on the back foot despite impressive employment figures

The rise of the USD has been unstoppable as positive economic data has convinced the market that the Federal Reserve will hike rates sooner rather than later. The USD/JPY has broken the 107 barrier and has further to advance as BOJ Governor meets with the PM Shinzo Abe to confirm that the central bank will act when needed. This time last year the pair was above 100 and with a 52 week range with current levels as the high and 96.57 as the low as the Fed was yet to announced the schedule of the taper program. Now a year has passed and the taper is soon to end.

The Yen is touching lows not seen since 2008. Japanese companies will benefit from a weaker JPY giving exports a competitive edge. Energy imports after the nuclear reactor disaster have dampened the overall boost to the island nation growth. More costly imports on a weaker JPY have influenced inflation but have widened the deficit even as exports continue to grow.

The Trans-Pacific Partnership is an opportunity for Japan to regain its exporting mojo as the diplomatic relations with China has hurt overall exports to the other Asian powerhouse. Subsidies and protectionist pact in Japan might yet derail Japan’s involvement in the agreement. The US and Japan have so far met multiple times on auto and farm tariffs with little progress.

Bank of Japan Governor Haruhiko Kuroda met with Prime Minister Shinzo Abe this week and told the market that he reassured the Japanese Leader about the central bank’s intervention. Kuroda says the BOJ is ready to act if needed. This is the default phrase used by all central bankers when they are pressured by the media. Abenomics has struggled to regain the market’s confidence after a roaring start in 2013. With a recently elected PM Abe and a newly appointed Kuroda the BOJ introduced a bold first move in an effort to reach the 2 percent inflation target promised by Abe. The USD/JPY quickly surged in an effort that boosted the local stock exchange. The efforts were specially effective given the inaction that other central banks like the Federal Reserve, the Bank of England and the European Central Bank brought to the table in 2013.

This year the BOJ has under performed, or rather not performed at all. Kuroda went from an aggressive policy maker, to a passive watcher of the Japanese economy. Analysts continue to question what is it that he does see as the central banker continues to maintain a positive outlook on the economy even as he has had to admit that the effects of the sales tax increase have been more than “transitory”. PM Abe needed to introduce the sales tax increase if Japan was ever to reduce the fiscal deficit, but the timing could have been better as it took the wind out of a weak recovery. Now the government will look at the third quarter results to decide the fate of the next phase of the hike.

Abe hinted that he needed a partner in the BOJ during his campaign and criticized the then current governor of the bank. After his return to the top job in Japan he made sure to hand pick a governor that subscribed to his lofty inflation target, he found his man in Kuroda. Now as the Federal Reserve is on the final stages of their tapering of bond-buying the Japanese policy makers are faced with a way to achieve inflation targets through imported inflation as the price of energy skyrockets versus a weaker JPY.

Australian employment numbers made headlines on Thursday, as Employment Change posted an incredible gain of 121,000 last month, crushing the estimate of 15,000. The markets are having some difficulty accepting these stratospheric figures at face value, with one Australian analyst noting that the numbers are “somewhat difficult to interpret”. The Australian statistics bureau claimed that a rotation in its survey group affected the August figures, and we’re likely to hear more about the authenticity of these numbers in the next few days. There were no doubts about the veracity of the unemployment rate, which dipped to 6.1%, beating the estimate of 6.3%. The Aussie posted gains after the employment releases but then retracted and continued to head southward.

The Australian dollar is sensitive to key Chinese releases, as China is Australia’s biggest trading partner. Chinese Trade Balance hit a record high in August, as the surplus climbed to $ 49.8 billion, easily beating the estimate of $ 40.8 billion. Stronger Chinese exports should translate into increased demand for Australian raw materials, which bodes well for the Australian export sector and the Aussie. On Thursday, Chinese CPI came in at 2.0%, as the index fell to a 4-month low.

Next Week For Asia:

Next week again will mark a western bias as the Reserve Bank of Australia’s minutes and the Bank of Japan Governor Kuroda Speech on September 16 with business leaders in Osaka and on the Securities Industry Convention in Tokyo on the 18 are the biggest impact events on the agenda.

The eyes of the market will be glued to the Scottish referendum as even the Bank of England’s governor had to skip the G20 meeting as the outcome could have major implications for the Union.

The Federal Reserve meeting on monetary policy ends on Wednesday. No change is expected in terms of the published rate and the pace of the taper which enters its final meetings. There is the expectation that they could alter the pace slightly to make sure that the meeting after next is the last one. Currently there is still a monthly 25 billion amount. The usual cut of 10 would leave 15 billion for next meeting. One option doing the rounds is that they could rise it slightly to 12.5 billion. Given how forward guidance is under review there is little expectation for Fed creativity so no change is the most likely outcome.

Fore more market moving events visit the MarketPulse Economic Calendar

WEEK AHEAD

* CNY New Yuan Loans

* GBP Consumer Price Index

* EUR German ZEW Survey (Economic Sentiment)

* GBP Bank of England Minutes

* USD Consumer Price Index

* USD Federal Open Market Committee Rate Decision

* NZD Gross Domestic Product

* CHF Swiss National Bank Rate Decision

* CAD Consumer Price Index

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