Week in FX Asia – INR Caught Between Inflation and US Fed

• Indian government battles inflation with restrictions. Inflation 6.01%
• Japan PM Abe fires third arrow. Corporate taxes expected to be cut.
• China leader optimistic on economy housing could be a risk.

INDIA

Geopolitical risk in Iraq has hit emerging markets specially hard if they are net importers of energy. India is struggling to contain rising inflation particularly in energy and food. The government introduced export restrictions on food items to increase supply and offset rising prices. Inflation rose last month from 5.20% upwards to 6.01% on rising food prices in particular staples of indian households such as onion and potatoes.

The USD/INR had an intense week that included the United States Federal Reserve FOMC meeting. The currency pair started the week on a depreciating trend with a high of 60.40 given the outflow suffered by emerging markets due to uncertainty. The INR recovered on the announcement that the Fed was not envisioning an earlier rate hike and stayed put on their tapering pace. The currency dropped below the 60 price line, only to give back some of that strength towards the end of the week where it hovers around 60.25.

Inflation control will be key for the new government headed by Mr. Modi. There is a lot of expectation on how this new government will work alongside the central bank. The Reserve Bank of India governor Rajan won foreign plaudits for his work in containing the currency rise and battling inflation.

It remains to be seen how the RBI and the Modi government agree on what needs to be done to contain inflation. Energy imports will be an important topic. This week India became the largest importer of Nigerian oil. Food can be contained with exporting measures, but India's need for foreign energy has no easy fix. The Modi government ran on a strong no energy blackout campaign that boosted the local energy generating industry in the local stock market. Energy is commonly denominated in USD which has hurt India as geopolitical strife has pushed black gold higher.

JAPAN

Earlier this week Japanese Prime Minister Shinzo Abe launched his much awaited policy measures to boost growth. The aim is to reduce government intervention in agriculture, employment and health care and open up the playing field to the benefit of corporations and stimulate employment and wage rises. Japan's corporate tax rate cut plans got much of the press as it is seen as the most likely to actually happen. The current rate is 35% but some officials have cited a 29% goal in a couple of years.

The JPY continued to shake off some of its gains as a safe haven as the Iraq and Ukraine headlines pointed to less urgency. The USD/JPY started the week at 101.76 and registered its highest point before the Fed meeting on Wednesday with 102.20 only to fall as Yellen stuck to the script a little too much leaving no reason to buy USD.

Trade data from Japan failed to impress this week. Exports and imports fell in may. Exports continue to suffer from strained relations with China. Japan exported 2.7% less year over year. Corporate Japan and consumers are still not giving Abe a vote with their wallets as they continue to decrease purchases which hurt much needed imports to raise inflation.

Abenomics first arrow has made the Bank of Japan the largest holder of Japanese debt. The BOJ now holds $1.97 trillion in bonds. This is a rise of 57.2% from last year. The central bank displaced the traditional number one holders, insurance companies. The Bank of Japan confirmed their positive view on the economic recovery and the Tankan report validated the CB as the manufacturing sector is also confident post sales tax hike.

CHINA

There was a lot of expectation on Premier Li Keqiang's visit to the United Kingdom. The visit could mean 18 billion pounds of new deals. London trails Singapore in CNY trading and it is sure to come up as UK banks will push for more open trading of the currency. There are hints that the visit targeted energy and financial services but the biggest outcome is the rise of China as a investor in G10 economies scaling up from their presence in the emerging markets.

Chinese housing continues to be an enigma. Prices went up this month, but the housing market still continues to feature as a big risk for economic growth. Analysts are calling this a tipping point for the Chinese economy. A housing recovery could tip the scales towards a faster and sustained recovery and vice versa a bust could derail all of Premier Li's promises of no hard landing for China.

Next Week For Asia:

China Purchasing Manager Index flash numbers will be released on Sunday. The figures will help the market decide if Premier's Li confidence has fundamental proof. Li does not expect a hard landing and the whole Chinese policy maker tone has switched from pessimistic to slightly optimistic about reaching their growth targets. The PMI has been below the 50 point line for five months which signals contraction. The good news is that it has progressively gotten better and last months print of 49.4 could mean China could break through to expansion on Sunday.

Inflation was key for India this week and next week it will be the focus in Japan. The Tokyo CPI and National CPI numbers will be released on Thursday. Inflation remains one of the indisputable bright spot of Abenomics and current energy turmoils could see a rise as Japan is a net importer of energy.

Fore more market moving events visit the MarketPulse Economic Calendar

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• BoJ Becomes Largest Holder of Japanese Debt – MarketPulse
• Japanese Economic Minister Says Corporate Tax Rate Could be 29% – MarketPulse
• India's Government Imposes Restrictions to Control Inflation – MarketPulse
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