FX In Range, IMF Warned Of Asian Slowdown

While most Asia equities strengthened today on improved risk sentiments, the currency markets are generally trapped in familiar range. The IMF said that Asian growth is projected to "pick up very gradually" and the region will remain the leader in growth. It expects Asia to expand "over two percentage points faster than the world average next year."

However, it also warned that "sustained high rates of growth over the medium-term cannot be taken for granted." And it expressed concern that "magnitude of the recent slowdown in some large Asian economies has raised concerns that it might not be just cyclical." And, considering that "inflation expectations have remained well anchored," IMF urged that "should activity fail to pick up as projected, further easing may be warranted."

Growth is Asia is estimated to be at 5.4% this year, around 0.6% lower than April's forecast. And, there is one-in-seven odds that Asian growth will fall below 4% in 2013. Hard-landing remains a lower probability for China.

IMF managing director Lagarde suggested that debt-ridden countries such as Greece and Spain should be given more time (e.g.: 2 years) to resolve their fiscal deficit problem as recovery would be hurt if the austerity measures were too harsh. While this might serve as good news for debt-ridden countries, creditors, especially the biggest one, Germany, were dissatisfied.

German Finance Minister Wolfgang Schaeuble stated that "the IMF has time and again said that high public debt poses a problem… So when there is a certain medium-term goal, it doesn't build confidence when one starts by going in a different direction…When you want to climb a big mountain and you start climbing down then the mountain will get even higher." Meanwhile, Largarde also called for creditors to give haircuts on debts loaned to Greece so as to close the gap more easily. Regarding this, Schaeuble said that, should this be really carried out, "the preconditions for further guarantees or payments would be destroyed."

IMF deputy managing director Naoyuki Shinohara said that Japan is "suffering from deflationary pressure but room for fiscal stimulus is limited." Instead, he urged there are "various things the BOJ can still do with monetary policy." And he suggested that if BoJ were to buy foreign bonds as part of the QE program, it would have to "do so continuously" and thus send a "wrong message" to the world.

It's equivalent to intervention and falls under the jurisdiction of the finance ministry, not BoJ. Regarding the territorial dispute with China, he's confident that policymakers of both countries are capable of finding a solution," But "if the situation deteriorates sharply, it might potentially emerge as a risk."

In US, Philadelphia Fed Plosser warned that the recent QE3 actions "carry significant risks." He reiterated his opposition in the September meting as "increasing monetary policy accommodation is neither appropriate nor likely to be very effective in the current environment." He said it's "unlikely to see much benefit to growth or to employment from further asset purchases." And the "potential costs and risks associated with these actions outweigh the potential benefits."

Also, he grieved again that "conveying the idea that such an action will help speed up the recovery risks the Fed's credibility." And Plosser expects that "the appropriate monetary policy is likely to become tighter more quickly than the Committee anticipated in its latest statement."

On the data front, Japan tertiary industry index rose 0.4% mom in August, domestic CGPI dropped -1.4% yoy. Eurozone industrial production, US PPI and U of Michigan sentiment will be released later today.