Chinese GDP growth for 2009 beat forecasts printing at 8.7% versus 8.5% projected while inflationary pressures increased markedly as CPI rose to 1.9% versus 1.5% eyed. The inflation rate was at its highest level in more than a year, turning positive for the second month in a row. The news heightened fears that Chinese monetary authorities will begin to tighten policy, possibly raising rates in Q1 of 2010.
Other data including Retails Sales which rose 17.5% versus 16.4% forecast was also impressive confirming the notion that Chinese policymakers have been successful at rebalancing growth by stimulating domestic demand rather than relying exclusively on the export sector.
The fears of potential tightening sent high beta currencies lower on risk aversion flows with the euro setting 5 month lows awhile Aussie dropped through the .9100 level. Overall, the idea of rate hikes from PBOC should not necessarily be bearish for the risk trade as it implies that growth in Asia Pacific region remains robust and should continue to help drive global recovery forward. However, the move to a more hawkish stance by Chinese monetary authorities comes at a time when growth in the Eurozone is beginning to cool.
Today’s EZ PMI data will provide the market with the freshest read on the state of economic activity in the 16 member union. If the report misses its mark the EUR/USD could test the key 1.4000 figure as currency markets become even more concerned that a potential slowdown in China and weak economic activity in both services and manufacturing sectors in the EZ could result in anemic growth for the region in 2010.
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