As Eyes Focus on the U.S. and Europe, Asia Forex Markets L:ook to Future

Daily commentaries on the foreign exchange market tend to concentrate on short-term ebbs and flows, as analysts, and traders alike, attempt to make sense of the current themes being bandied about the press and around global watercoolers. Presently, the big issue is the timing by the U.S. Fed as to when tapering of its daily bond purchases will commence. September has passed, and now the wait for December has pushed back the exercise of reordering current market valuations. Forex pairs in Asia, however, may also beat to these western drums, but a longer-term view is now in the making.

During this past week, two bits of news may have passed by unnoticed, due to the flurry of rumors and innuendos surrounding central bank announcements, both in the U.S. and in Europe. First, a preliminary measure for manufacturing progress in China rose to 51.2 percent, its highest reading in six months and a signal that the Chinese economic engine may be ready to accelerate once again. Wang Tao, chief China economist at UBS AG in Hong Kong, reported, “China’s growth rebound has continued to gather some momentum, especially in exports.”

The news was offset to a degree by a report from the Asian Development Bank (ADB) that forecasted more risk and a tightening in bond sales for East Asia countries. While the markets are still expanding, the concern is that the outflow of investor capital may put pressure on currency valuations. Iwan J. Azis, a spokesperson for the local ADB, commented, “Asia’s bond markets and its borrowers are better placed to stand up to this latest round of global volatility than they were in 1997-1998 but tough times certainly lie ahead.”

The news is mixed, but what does this mean for developed country currency pairs:

Both the Aussie and the Kiwi have declined measurably over the past two quarters, but each appears to have established a floor of resistance and a foundation for future growth, if you take the long-term view of the present situation. Yes, each pair has fluctuated wildly over the past few months, but each had finally penetrated the foreboding Kumo Cloud and the hovering 100-Day EMA (denoted by the curving red line on both charts).

Both pairs are currently pondering their next moves that would most likely be upward if the tapering issue were to dissolve. Economic data in the United States continues to gradually improve, but the present impasse in Congress brings back horrible memories of previous debates over the debt ceiling and another looming fiscal cliff that must be addressed. Markets abhor uncertainty, and, although political tensions over chemical weapons in Syria seem to be subsiding, the inability of the U.S. government apparatus to function in an orderly manner will disrupt global capital markets.

Asia markets, however, follow in lock step whatever is happening or thought to be happening in China. China, always low in natural resources of its own, must import raw materials from Australia and food products from New Zealand. Demand for China exports has definitely slackened from the West as expected, and strong currency values have also adversely impacted the export activity in Australia and New Zealand. Politicians in both countries have been pushing for weaker currency valuations for months, but if China growth picks up, as the IMF and World Bank believe is inevitable, then prosperity cannot be too far down the road.

The issue, as always in the forex market, is timing. After the Great Recession, traders capitalized on big appreciation moves in both the Aussie and the Kiwi. Is it time again to go long?

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