Learning the lessons from Japan
Comment of the Day

October 13 2011

Commentary by Eoin Treacy

Learning the lessons from Japan

Thanks to a subscriber for this interesting report from Nomura. Here is a section on Asian inflationary expectations:
Looking beyond bad weather, there are several more fundamental countervailing forces acting on Asian inflation, some of which are gaining in intensity. One is the economic growth outlook. Asia's economies have clearly entered a downcycle; so far, it has been relatively shallow, but we see the risks firmly skewed to it becoming deeper, in which case economic slack will open up, reducing demand-side price pressure. Another is the big drop in commodity prices. The CRB commodity price index - which, of the various commodity prices measures, we found to have the strongest empirical relationship with Asian CPI inflation - has fallen from 343 at the end of August to 305 in early October, an 11% drop. The impact of falling commodity prices on easing Asian inflation can be acute given that the average weight of food and energy items in CPI baskets in Asian countries is 44%. On the other hand, in the past month Asia has experienced large net capital outflows, causing Asian currencies to weaken against the USD, the most extreme cases include a 10% depreciation of the Korean won, followed by 6-8% depreciations of the Indian rupee, Malaysian ringgit and Singapore dollar. Weakening currencies raise the cost of imports, which can ultimately be passed through, increasing CPI inflation.

Eoin Treacy's view While most investors have concentrated on the various stimulus options being considered by the USA, UK and Europe, most of Asia ex-Japan remains in tightening mode. Inflationary measures have been too high for too long and central banks have become more aggressive in their efforts to bring expectations back into line. Commodity prices still have a large weighting in the CPI measures for most Asian countries so the outlook for this sector is important from the perspective of monetary policy easing in Asia. .

The Continuous Commodity Index (Old CRB) hit a medium-term peak below 700 from April, ranged above the 200-day MA until late September and broke emphatically lower. The MA has now turned downwards. A relief rally is underway which could help close the overextension relative to the MA but a sustained move above 630 would be required to suggest demand is returning to medium-term dominance.

Brent crude prices have posted a progression of lower rally highs since April. The most recent was at $116.50. Prices have rallied impressively since the beginning of the month but have become somewhat overbought in the short-term as they test this first area of potential resistance. A clear downward dynamic from the current area would reconfirm supply dominance.

Back to top