Asian Markets Remain Volatile after China's Move
Figure 5 - China GDP Growth Rate (%)
China recorded its largest trade deficit since 1989 in February, according to a customs bureau report released in mid-March. The $31.5 billion shortfall was driven by a 39.6% jump in imports counterbalanced with just an 18.4% increase in exports. Coupled with slowing industrial output and retail sales, the market is now expecting the country to ease its monetary policy in order to support growth and get the economy back on track.
SEE: How The U.S. Government Formulates Monetary Policy
The market will be looking for the country to lower its bank reserve requirements in order to shore up spending. And a new economic stimulus may also be in the cards given the lower-than-expected inflation figures that hit a 20-month low in February. But of course, the country must be very careful not to bring inflation back into the picture just when it managed to bring it down.
Japan Sees Signs of a Turnaround
Figure 6 - Japan GDP GrowthRate (%)
Where China has stumbled, Japan has seen signs of a reversal of fortune. In January, the country reported that core machinery orders increased at a faster-than-expected pace of 3.4%. Japan has also reported gains in industrial output and an upward revision to its fourth quarter GDP, which suggest that its economy is recovering from last year's disaster and a recovery could take hold sooner than the market initially expected. The Bank of Japan announced in a mid-March meeting that it would keep monetary policy actions on hold, despite one board member's proposal for more stimulus spending following last month's easing. While the move may be a disappointment to some in the market, the central bank is betting that the move will contain inflation at a time when the economy is already showing signs of an organic recovery.
What to Look for Ahead
Forex traders will be closely watching the Bank of Japan's minutes released on April 12, as well as its merchandise trade report on April 18, and the industrial production figures due out on April 26. With stimulus spending on hold and signs of a recovery in place, the market will be watching for signs of an increasingly robust recovery that could lead to higher interest rates down the road.
Britain May Avoid a Recession but Obstacles Remain
Figure 7 - U.K. GDP Growth Rate (%)
Britain has seen some positive economic signs over the past month, despite its brutal drop in fourth quarter GDP. In February, the country reported its biggest surplus in four years of 7.75 billion euros in January, which is up from 5.2 billion euros during the year-ago period. This may free up some funds for a temporary stimulus package that could help improve the country's still-ailing economic performance and avoid another recession. SEE: The Impact Of Recession On Businesses
Meanwhile, Britain is forging onward with its austerity program set into motion almost two years ago. With the third highest deficit among developed countries, after Japan and the U.S., the government aims to eliminate the deficit by 2017.
Headwinds Remain for British Economy
But the British economy still faces numerous headwinds that could derail its recovery. The country's workforce has become quizzically less efficient in what economists are calling "the productivity puzzle." This helped contribute to a less-than-expected increase in manufacturing output during January, as pricing pressures intensified. Combined, these factors could keep pressure on the British economy, particularly with stagnant unemployment.
The country's unemployment rate remains at its highest level in 16 years, according to the Office for National Statistics. Meanwhile, the country's ongoing austerity programs could cost another 700,000 government jobs moving forward, which will put further pressure on the already dire situation. This recently led to Fitch threatening to downgrade the country due to its inability to deal with shocks.
SEE: Why You Shouldn't Trust Ratings From Ratings Agencies
What to Look for Ahead
Forex traders will be closely watching for Britain's CIPS/PMI Services Index data due out on April 4th for signs of a more robust economic recovery. This could help the country's employment situation improve and ultimately help ease the implementation of its austerity measures. The market will also be closely watching the Labour Market Report due out on April 18 for any signs of improvement, as well as Retail Sales data on April 20 for a gauge on consumers.
Switzerland Stays the Course as Recovery Takes Hold
The Swiss economy may have only realized a modest 0.1% gain during the fourth quarter of 2011, but the economy has been showing dramatic signs of improve as of late. A survey conducted by the Centre for European Economic Research and Credit Suisse showed that economic expectations for the country significantly improved for a third month in March. And the Swiss government recently raised its 2012 growth forecast to 0.8%.
These improvements have been accredited to a controversial, but successful, monetary policy undertaken by the Swiss National Bank (SNB). The central bank is expected to keep borrowing costs at zero, while maintaining its ceiling of 1.20 francs per euro, according to a recent survey of economists conducted by Bloomberg News. Meanwhile, the easing of Europe's debt crisis has certainly helped moderate the Swiss franc's dramatic rise.
SEE: The Swiss Franc: What Every Forex Trader Needs To Know
Franc Remains Overvalued as Risks Remain
Despite these improvements, regulators continue to believe that the Swiss franc is overvalued, since it has been used as a currency safe-haven throughout the crisis. The currency remains some 30% stronger than when the financial crisis began in 2008, as the market remains somewhat skeptical of Europe's recovery to date. If the situation worsens, the market can expect renewed appreciation of the Swiss franc.
What to Look for Ahead
Forex traders will be closely watching Switzerland's KoF leading indicator – a composite of business surveys from various sectors of its economy – due out on March 30. Meanwhile, the market will also be watching the situation in Europe for any of signs of improvement or deterioration. More problems in the Eurozone could lead to further appreciation of the Swiss franc, while further improvement could result in a lower valuation over time.
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