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The overnight releases of Chinese PPI and CPI failed to garner the excitement they had promised, with Asian stocks managing a mixed performance. CPI did print a 16 mth high of 2.7% y/y but at these levels the rise in inflation can still be deemed as relatively moderate (CPI hit 8.7% y/y in 2008). That said the strength of Chinese loan data suggest that inflationary risks are firmly bias to the upside and have been sufficient to trigger speculation that CPI will rise above the 3% gov't target in the months ahead and bring forward a BoC rate hike potentially into Q2 . The threat of Chinese monetary tightening pushed the JPY higher overnight in a move that was largely unwound in London hours. Speculation that the BoJ will announce addition monetary stimulus on the Mar 16 meeting continues to undermine the JPY. On first sight this morning's downward revision to Japan's Q4 GDP to +0.9% (from 1.1% q/q) enhances the pressure on the BoJ to act further. However, much of the downside revision comes from inventories. The fact that Japan's GDP is yet to benefit from a bounce in inventories is encouraging for the Japanese economic outlook. While the Japanese economy may be in recovery mode, deflation remains a threat suggesting more policy measures are likely. While USD/JPY is likely to trend higher medium-term encouraged by interest rate differentials, the near-term path of USD/JPY may be distorted by repatriated demand for yen ahead of fiscal year end.
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