Posted on January 9, 2018 at 5:14 pm GMTChristina Parthenidou, XM Investment Research Desk
During the period 2012-2016 everyone was talking about the deflationary spiral in China, with those who are heavily dependent on Chinese imports blaming the world’s largest exporter for stealing inflationary pressures from them and therefore interrupting their monetary policy. But today, someone could say that China could be a gift for those who hope for inflation to pick up as growth in Chinese prices turned increasingly positive in 2017 and is expected to keep rising smoothly in the coming years according to IMF and OECD forecasts. Wednesday’s inflation numbers see consumer prices increasing faster in December, though, costs faced by producers might slow down.
The government’s efforts to control pollution problems by reducing steel production and coal-fired electricity harmed demand for raw materials and therefore factory activity, driving producer price inflation to a four-month low of 5.8% on a yearly basis in November. Since environmental measures were said to be stricter during the heating season (starting in mid-November) in northern China, December’s annual PPI is anticipated to come in weaker at 4.8%, the lowest print seen in a year. Besides that, a slowdown could also emerge to some extent to the high base effect (high inflation in the corresponding month of the previous year would result in a smaller increase in the index).
On the consumers side, inflation is estimated to climb by 0.2 percentage points to 1.9% y/y remaining still well below the PBOC target of 3.0%, while month-on-month the gauge might rise to 0.4%. Falling food prices, and specifically, a drop in pork prices which reflect approximately 3.0% of the index, pressured CPI in the past nine months but recent evidence indicated that these effects have dissipated. Massive debt levels (counting for almost 300% of GDP) threatening to bring a bubble also kept inflation pressures within boundaries forcing the PBOC to restrict short-term liquidity.
Turning to forex markets, better than expected reading for PPI would work for the aussie/dollar given that China is the main export partner of Australia. Moving to the upside the previous top at 0.7874 could provide an immediate resistance, while any close above this handle would shift focus towards the 79 area, making the pair increasingly bullish in the short-term.
On the flip side, lower PPI figures in China would drive the aussie down to retest the 0.76-0.77 zone which acted as resistance during the past two months.AUDUSD