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Asia's week ahead: All eyes on the Fed

Will it or won't it?

The question that central-bank watchers and investors have been asking may finally see an answer this week, when the Federal Reserve's rate-setting Open Market Committee meets for a 2-day meeting on Wednesday.

According to a poll by Reuters in August, the U.S. central bank is widely expected to raise short-term interest rates as early as September, having not raised rates since 2006 while maintaining them at near zero.

But an abrupt devaluation of the yuan by Chinese authorities in August and renewed turmoil in global financial markets have had some market watchers paring back their forecasts. The World Bank's chief economist has joined Christine Lagarde, managing director of the International Monetary Fund, in warning that a rate rise could trigger "panic and turmoil" in emerging markets.

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While analysts remain divided on the trajectory of the Fed's monetary policy, they are unanimous that Asia's financial markets will be in for a highly-volatile week.

"The calm [on Friday] is only the eye of the storm as volatility is sure to return with a vengeance this week," IG market analyst Angus Nicholson wrote in an e-mail note last week. Huge swings were absent in Asian stock markets on Friday as weary investors stayed on the sidelines ahead of the FOMC policy meeting.

"With the probability of a Fed rate hike [at] the highest it has ever been, there is likely to be plenty of movements whatever the outcome," the Melbourne-based analyst added.

A Federal Reserve police officer walks past the Marriner S. Eccles Federal Reserve building in Washington, D.C.
Andrew Harrer | Bloomberg via Getty Images
A Federal Reserve police officer walks past the Marriner S. Eccles Federal Reserve building in Washington, D.C.

Policymakers in Japan and Thailand are due to meet on Monday and Wednesday respectively, but analysts say they are unlikely to make any moves ahead of the Fed's decision on Thursday.

Central-bank watchers expect the Bank of Japan (BOJ) to maintain its expansionary monetary policy, while the Bank of Thailand (BOT) is seen holding interest rates steady at 1.5 percent this week, as it awaits the effects from its previous rate cuts in March and April.

Key data releases

Meanwhile, a slew of economic indicators could also serve up more risks for Asia in the week ahead.

Japan's exports are expected to slow further in August, economists polled by Reuters said, underscoring concerns about the fragile recovery in the world's third-biggest economy. Exports are seen rising 4.0 percent from a year earlier, down from 7.6 percent in the preceding month. Imports may fall 2.2 percent on-year, compared with a drop of 3.2 percent in July.

This translates into a monthly deficit of 541.30 billion yen a year earlier, versus the trade deficit of 268.40 billion, the Reuters poll indicated.

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In India, the twin inflation data due on Monday will likely add to the pressure on the Reserve Bank of India (RBI) to cut interest rates at its meeting later this month.

For August, wholesale prices may fall for the tenth straight month, falling 4.4 percent on the back of plunging global energy costs and weak food prices, a Reuters poll showed. The wholesale price index (WPI) dropped 4.05 percent in July.

Economists polled by Reuters also expect consumer inflation to ease to 3.60 percent in August on-year, from July's all-time low of 3.78 percent.

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Due on Thursday, New Zealand's second quarter gross domestic product (GDP) is seen growing 0.5 percent from the previous three months, according to Reuters, picking up pace from the first quarter's 0.2 percent rise which marked the country's lowest quarterly growth rate in two years.

On a year-on-year basis, the economy likely expanded 2.5 percent in the April-June period, down slightly from 2.6 percent in the first three months of 2015, as exports continue to weigh on growth given the sustained slump in dairy prices.

However, the Reserve Bank of New Zealand's (RBNZ) easing bias should lift household consumption in the second half of 2015, Moody's Analytics said. Last Thursday, the RBNZ cut its benchmark interest rate by 25 basis points for the third consecutive meeting while signaling the possibility of further easing.