Release: China CPI y/y (Jan)
Consensus Forecast: 4.0%
Previous:
4.1%
Date/Time: 02/08/12 8:30PM ET (01:30 GMT, 02/09)

Release: PPI y/y (Jan)
Consensus Forecast: 0.8%
Previous:
1.7%
Date/Time: 01/31/12 8:30PM ET (01:30 GMT, 02/09)

 

Has China Tamed the Inflation Dragon

In Thursday’s Asia session China releases its latest reading on inflation. Headline annual inflation is expected cool a bit further in January to a 4.0% pace from 4.1% in December, which would further confirm that inflation peaked in mid-2011.

Producer prices meanwhile are expected to show just a 0.8% annual increase, which would imply that the pass through to consumer prices from the producer side of things should be minimum in the next month.

The news can help to give Chinese authorities some extra scope to loosen monetary policy considering there are growing concerns about China’s growth, with the main move expected being a drop in China’s reserve ratio requirement.

Many investors and analysts predicted a cut prior to the Chinese New Year, but the PBOC did not deliver.

The reserve ration requirement remains at 21%, with economists expecting to see the rate reduced down to 19% by the end of the year.

Still, Chinese authorities, either cautious to see inflation completely beaten, or cautious about giving the go ahead to more borrowing, have so far used other tools to ease policy.

From Reuters: “Policymakers seem happy to keep them that way, defying expectations of a move and instead waiting as long, and pulling as many alternative levers as possible, to delay the first of what economists think could be many as six RRR cuts this year.

The People’s Bank of China has opted for open market operations to inject short-term liquidity into the financial system in recent weeks, helping to keep credit flowing as growth in the world’s second-biggest economy hits a sticky patch due to weak global demand.

Beijing is reluctant to give the green light to another bout of big bank lending while it is still gauging how deep or shallow the latest economic downturn is, especially as policymakers are still trying to soak up the credit excesses and inflationary pressures spawned by a 4 trillion yuan (401 billion pound) economic stimulus programme in 2008…

They are more willing to accept more slowdown and refrain themselves from over-stimulating the economy — basically the same mistake they made years ago.”

The expectations of a reserve ratio requirement cut are not going away and currency traders should be on the lookout of the even as it can have an important impact on commodity currencies.

From Business Week: “China needs to cut lenders’ reserve- requirement ratios “several times” this year as the central bank’s increased use of reverse-repurchase agreements isn’t a substitute for tackling structural liquidity shortages, according to China International Capital Corp.

A cut in reserve ratios is “inevitable,” Wensheng Peng, economist at CICC, said in a report dated today.”

Therefor today’s inflation data can do 1 of 2 things.

If the inflation data comes in stronger than expected, showing a resurgence in prices that would validate the wait and see approach of Chinese officials. That would be a blow to risk sentiment and can work to weaken the Asian-Pacific higher yielding commodity currencies – the AUD and NZD.

If prices fall more than expected, that could increase the speculation around an imminent cut to the reserve ratio requirement, as it would mean that inflation is tame, and the central bank can focus on boosting growth. A 50 basis-point cut in reserve ratios adds 400 billion yuan to China’s financial system. That would be a significant boost to risk sentiment and can help to usher in further gains for the AUD and NZD against “safe haven” rivals like the USD and JPY, especially if that is accompanied by some type of deal out of Greece which can help to boost equities, commodities, and higher yielding currencies.

 

 

 

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Nick Nasad is an analyst, educator, and trader; and one of the main contributors to  FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

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