Inflation data from China released earlier today showed inflation in the month of February rise to 1.4% beating estimates of a slower increase to 1%. Overall, February’s inflation was stronger compared to the previous month’s dip to 0.8%. The rise in inflation was mostly due to higher prices of foods and is expected to be short-lived due to seasonality. The markets expect inflation to continue to push lower in the coming months.
Producer Price Index was, however, weaker coming out worse than expected at -4.8%, below estimates of -4.3% posting one of the most negative PPI readings last seen since October of 2009. The negative PPI underlines the deflation in the Chinese factories that started since 2012. The dip in the PPI was attributed to falling commodity and oil prices.
With inflation not clearly out of the woods, further data in the coming months will be closely scrutinized in anticipation of more monetary policy easing from China. The world’s second largest economy cut interest rates earlier this month but refrained from unleashing any additional stimulus package as the threat of taking on more debt by companies continues to be a thorn for the PBoC. Instead, the Peoples Bank of China besides cutting interest rates also lowered its net deposit rates as well as reducing the reserve requirements ratio for its banks in a bid to boost lending in the Chinese markets. But the threat of the housing market continues to remain on the horizon as there are many signs that the property market was cooling down due to lack of demand. Also earlier this month, the Chinese government posted a growth target of 7% for 2015, down from 7.5% previously in a clear sign that the Chinese economy was slowing down.
Given the scenario, it would be a tough maneuver for the PBoC in the coming months as it tries to tackle lower growth.
The Asian commodity risk currencies, the Aussie, and the Kiwi dollar did not react much to the news as the data was viewed as being mixed. With Australia being China’s closest trading partner, the Aussie dollar has been susceptible to economic data from China in recent years. Prospects of monetary easing from the PBoC, often gives the Aussie dollar a boost which in turns helps to push the Kiwi dollar as well.
At the time of writing, the Australian Dollar was trading near lows of 0.765 with the possibility of rising higher to retest the broken short term support at 0.7692. The Kiwi Dollar was also weaker this morning trading at lows of 0.7307 at the time of writing with the major risk to the Kiwi coming from the RBNZ monetary policy meeting later tomorrow.
The Greenback continues to remain bullish against most of the currencies and with today being a relatively quiet trading day with not much of the market moving events, the same trend is likely to continue into today as well.
