weekly outlook

The hotter than expected China CPI data released on the weekend has not impacted any of the major currency pairing so far this morning. Even though November"s CPI at 5.1% was higher than the median forecast 4.8% - the market was pricing in an upside surprise and a Chinese press report on Friday suggested the number might come in above 5.0%.

Better than expected China Industrial Output and Fixed Asset Investment suggests the Chinese economy is robust enough to absorb further monetary tightening. The China Securities Journal ran an article on the weekend suggesting China was close to the end of their tightening cycle and the market was overly aggressive in pricing in further tightening in 2011. The article said that Chinese authorities were reluctant to raise interest rates, as it could accelerate the flow of cash into emerging market economies from investors taking advantage of QE strategies in developed economies. Nevertheless economists still expect China to hike rates ahead of year end and will continue to tighten policy well into 2011. Some analysts were predicting a rough start to the AUD/USD due to the high China CPI, but that has not been the case with the market showing very little interest so far on Interbank.