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Week ahead: Which Asian central banks will ease?

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Asian central bank decisions are in the spotlight this week as policymakers debate the best course of action amid expectations of a looming U.S. interest rate hike in September.

The Bank of Japan (BOJ), Reserve Bank of India (RBI), Reserve Bank of Australia (RBA) and Bank of Thailand (BOT) are all due out with monetary reviews.

On the economic calendar, the final China Caixin/Markit purchasing managers' index (PMI) for July took center stage. Data on Monday showed the index dropping to a two-year low of 47.8, well below the 50-mark separating growth from contraction and the preliminary reading of 48.2. That was in contrast to Beijing's official PMI figure of 50 released over the weekend.

"July data signaled that the downturn in China's manufacturing sector intensified at the start of the third quarter. Renewed falls in both total new work and new export orders led manufacturers to cut production at the fastest rate since November 2011. Softer client demand and reduced output requirements contributed to further job shedding and lower purchasing activity, with the latter declining at the sharpest rate since January 2012," Caixin said in a report.

Who's gonna ease?

Central banks in Japan and Thailand are widely expected to stay on hold when they hold meetings later in the week, but India and Australia both hold their meetings on Tuesday and economists are divided on the likely outcomes.

Recent improvement in India's annual rainfalls—known as the monsoon—is a key reason why Governor Raghuram Rajan could leave the current 7.25 repo rate unchanged on Tuesday, Barclays said in a Friday report. The bank pointed to data showing cumulative rainfall to date was normal at 96 percent of the long-period average.

On the other hand, strong external balances give the RBI more room to ease, argue economists at Moody's Analytics. They expect a 25 basis point cut on Tuesday, which would mark the fourth move lower this year.

"With commodity prices continuing to fall, inflation will likely weaken in coming months. Weak industrial production and auto sales will likely sway the RBI towards another rate cut," they said in a note.

But the country's two-speed inflation rate is problematic for the central bank. The wholesale price index has declined throughout 2015, while the consumer price index stands at 5.4 percent, an eight-month high.

It's also a close call for the RBA, which also meets on Tuesday.

"Recent commentary from Governor Stevens suggests the RBA is not in a hurry to cut rates again," Shane Oliver, head of investment strategy at AMP Capital,said in a note Friday. Other factors, such as stronger-than-expected jobs data and a desire to confirm that efforts to slow property investment are working, could mean rates remain steady at their current record low of 2 percent.

However, the bleak outlook for investment, continued sub-par economic growth, a relatively strong Australian dollar, and benign inflation suggest the odds are in favor of a rate cut, Oliver said.

An economic pulse-check

Indonesia's growth report card for the April-June quarter on Friday could spell further trouble for Southeast Asia's largest economy as the rupiah trades at seventeen-year lows.

A Reuters poll of economists estimated annual GDP growth around 4.6 percent, weaker than the 4.7 percent in the first three months of the year. That would mark the country's slowest pace of growth since the third quarter of 2009, during the Global Financial Crisis.

Elsewhere in the region, Australia also releases June foreign trade and retail sales data on Tuesday alongside the RBA decision.

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Its monthly trade deficit is expected to remain large at 2.9 billion Australian dollars (around $2.11 billion) following a A$2.8 billion deficit in May, mostly due to the sustained weakness in iron ore prices, the country's top export, Moody's Analytics said.

Meanwhile, retail sales could tick up a modest 0.3 percent on month, compared with a 0.3 percent rise in the previous month, according to AMP's Oliver.

July employment data on Thursday could show a gain of 5,000 jobs, with the unemployment rate rising to 6.1 percent, from 6 percent previously, Oliver added.

Finally, Malaysia's June foreign trade report Wednesday could draw some attention after data last week showed the county's foreign exchange reserves fell to a five-year low and in danger of sliding below the psychological $100 billion level.

Moody's Analytics expects the trade surplus narrowed to 4.5 billion ringgit (around $1.18 billion), from 5.5 billion ringgit the previous month, given continued declines in energy prices. Malaysia is a net energy-exporting economy. With the ringgit trading at seventeen-year lows, that's also putting upward pressure on its import bill, the firm added.