In a couple of hour’s time, China will release its yearly inflation data. Estimates are already on the downside, as economists surveyed expect inflation in China to rise at a slower pace of 1.1%, down from the 1.5% growth previously in December. The bearish view on inflation comes from the decline in Crude oil prices and a general slowdown in the economy.
Recently released economic data from China showed a slump in both the imports as well as exports sector. The weakness in the Chinese economy already saw the PBOC cut its reserve requirement ratio last week (which managed to provide a temporary boost to the risk commodity currencies, especially the Australian dollar). The purpose of the RRR cut was to boost credit conditions and growth in the Chinese economy which has been showing signs of cooling down.
An inflation print closer to or below the expectations could spark some serious debate about a possible rate cut from the PBOC, considering that the general theme has been for rate cuts across the globe led by Bank of Canada and the RBA to name a few.
The inflation data could potentially set the theme in the currency markets. Given that Australia is one of China’s biggest trading partner and its close proximity, the Aussie dollar is likely to see some volatility on the news release. Of course, it would be difficult to judge how the markets will react to the news.
A weaker inflation report could possibly be read as bullish for the markets taking into context the possibility of a PBOC rate cut, while at the same time, a better than expected inflation report could still put the markets on a fence seeking direction.
Earlier on Monday, the Australian dollar opened weak but managed to trim its losses from Friday’s strong US NFP job numbers. The Aussie dollar made a fresh multi-year low to 0.7626 levels before easing back to close the week modestly lower at 0.7761 levels.
The pair has, at the time of writing managed to stay well supported above 0.78, but momentum has slowed down in anticipation of the China inflation report. The same trend can also be viewed across various AUD crosses as well, highlighting the importance of the data.
The last time PBOC cut interest rates was back in November 2014 to 5.6% on a 40bps cut. The inflation rate since then (Nov-2014) has hovered between 1.6% and 1.4%, so should the current inflation print fall below 1.1%, it could potentially set a new low and could in fact spark a rate cut from the PBOC, which will in all likelihood trigger a rally in the markets but not before a reactionary panic sell-off in the global equity markets. Keep an eye out for volatility in the commodity risk currencies as well as Gold.
