Emerging Money's  Instablog

Tonight sees a lot of economic numbers coming out of Beijing. Global investors will be glued to the inflation data in particular as the key to yesterday's interest rate hike. Until yesterday, economists expected to see confirmation that Chinese consumer inflation edged up to an annualized rate of 3.6% in September from 3.5% in August.

While this would have been well outside Beijing's stated inflationary comfort zone of around 3%, it may not have been enough to trigger the surprise rate hike that took global markets on a bit of a ride yesterday. The question is whether the People's Bank of China (PBOC) knows something about tonight's numbers that we do not.

One thing is clear: Even after the rate hike, retail deposits in China are still paying less in interest than inflation will take out of their purchasing power. The new deposit rate is 2.5%, so as long as inflation remains above that level, PBOC is unlikely to be able to encourage many Chinese to leave their cash in the bank. In fact, with local food prices rising 7.5% in August, Beijing may be getting nervous about whether Chinese peasants will still have enough to eat if inflation persists at current levels.

Beyond that, the economic book may be able to go on unimpeded by tighter monetary policy. If so, the yuan's paradoxical retreat from the rate hike -- normally higher interest rates strengthen the underlying currency -- may unwind in fairly short order. Good news for CNY and CYB:

 

Disclosure: no positions