For international companies trading in Asia, multiple fundamental conditions need to be monitored. The general strength of domestic demand is important while fluctuations in US interest rates and the dollar’s level will have an important impact on Asian financial conditions.
The ability to gain only a small advantage will be crucial for profitability, especially given strong competitive pressures and relatively thin profit margins.
The strength of overall growth conditions within the Asian economy will be a key focus and relative prospects between countries will also be a very important influence.
The dollar’s level is a key element in determining costs and margins for both importers and exporters.
The US currency’s level also has a key impact on Asian economies, especially as many companies and institutions borrow through dollar-denominated loans. When the dollar strengthens and US interest rates increase, debt-servicing costs in Asia rise which increases the risk of a wider economic downturn.
In general terms, therefore, high US interest rates and a strong dollar will tighten financial conditions and tend to undermine Asian growth prospects while a weak dollar and low US interest rates tend to boost growth prospects as financing conditions ease.
It is also important to look at individual country-risk profiles and look for potential vulnerabilities. Below are the list of top 10 events on your economic calendar if you are selling or buying from Asia, courtesy of MoneyTransferComparison.com.
US Federal Reserve policy
The Federal Reserve controls the level of short-term interest rates in the economy, although it is important to note that there is no direct control of longer-term interest rates even though policy changes will impact rates across the yield curve.
If the Federal Reserve raises interest rates, there will tend to be upward pressure on the dollar while a cut in rates tends to weaken the US currency.
The Federal Reserve policy decisions are a crucial element in determining underlying prospects for the US and Asian economies.
US CPI data
The monthly US CPI data has an important impact on US interest-rate expectations. Any increase in the inflation rate will increase pressure for monetary policy to be tightened in order to keep inflationary pressure under control. Higher inflation will also tend to strengthen the dollar and tighten overall financing conditions in both the US and Asian economy.
China trade data
China’s economy has a very important impact on the global economy and developments within China will also have a key impact on the wider outlook for Asia.
Conditions within China will have an increasingly important and crucial impact on US businesses which engage in overseas trade.
Chinese GDP data does command market attention, although there are important doubts surrounding its reliability. In this context, the trade data is a more important indicator of underlying trends in the Chinese economy and real capital flows. Strength in exports and imports are an important indicator of robust growth in both the Chinese and global economy while weakness is a key warning sign.
China/India PMI index
The Chinese and Indian economies are crucial for the overall Asian economy. The Caixin Chinese PMI data published by Markit is a key indicator on strength in the economy. Official data is also published and the message from official data is much stronger if backed up by data from the Markit data.
Markit also produce the monthly PMI data for India.
PMI data is based on surveys of purchasing managers in key companies. The fact that the data is based on real activity by companies makes it a particularly valuable source of information on underlying economic trends.
The Chinese central bank (PBOC) maintains tight control of the exchange rate with only limited fluctuations allowed on a daily basis.
The yuan is still an important indicator of underlying conditions within the Chinese economy. If the yuan is under pressure or devalued, this is an important indicator of stresses and potential capital outflows triggered by a loss of confidence.
A weaker trend in the Chinese economy would have important adverse implications for the Asian economy as a whole.
In contrast, a stronger yuan will underpin confidence in the Chinese economy and also underpin wider Asian growth trends.
Reserve Bank of Australia monetary policy decision
The Australian economy is an important component of the Asian economy and it is also a key barometer of conditions within other economies given that Australia is a big exporter of commodities to the rest of Asia, especially China. If the Reserve Bank is confident surrounding the export outlook, there will be an increase in underlying confidence surrounding Asian growth.
OECD global leading indicator
The extent of Asian demand will be determined to an important extent by wider trends in the global economy. One important source of the data is the OECB leading economic indicator. This index is a composite of all OECD countries which includes the largest economies. Strength in this indicator will provide important insights into likely growth developments within the Asian economy.
Many Asian economies have currencies which are either linked directly to the dollar or have an informal peg with the US currency.
If there is strong pressure for currencies to depreciate amid weakening economic data and deteriorating trade balances, this will show up in declining currency reserves as central banks attempt to support their currencies. A sustained drop in reserves is an important warning sign of economic difficulties.
Baltic Dry Bulk Index
This is not a headline indicator by any means, but is watched closely by professionals. The index measures the global cost of chartering ships to transport dry bulk cargoes. When there is strong demand in the global economy with robust trade growth, there will be strong demand for shipping which tends to put upward pressure on prices.
When global growth is weak, demand for shipping will be weak which will tend to put downward pressure on prices. The data provides important insights into the strength of global demand. View Further details on the Baltic Dry Bulk Index here.
Iron ore price
Given the importance of manufacturing in the Asian economy, the price of iron ore is an important indicator of underlying Asian economic strength.
Strength in iron-ore prices signals strength in the Asian manufacturing sector, especially as it points to strength in China.
Weakness in iron ore, however, suggests that overall demand conditions are weak and the Asian economy is unlikely to perform well in this environment.