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.

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