Stronger Than Expected Growth Creates Worries over More Hawkish Bank of China

In the Asian session we saw China release its monthly economic indicators on inflation, production, sales, and GDP. Growth accelerated to an annual pace of 9.8% during the 4th quarter, which was faster than expectations of 9.4% growth. Industrial production and retail sales also both came in above expectations for December. Output rose 15.7% on the year when forecasts called for a 15.5% gain, and sales were up 19.1% on the year, compared to a forecast of 18.7%. Consumer inflation meanwhile tempered a bit, falling down to 4.6% from 5.1% for December, as expected.

Usually, positive news from China is taking as a boost for global equities and commodity currencies as it means the world's economy is growing at a faster clip. That wasn't the case today, as the data may have been a bit too good, showing investors and traders the possibility that the country's economy is overheating. If growth continues at this pace, inflation is likely to rise yet again. For all of 2010, China grew 10.3%, stronger than the 9.2% pace seen in 2009. The aim by Chinese official is to keep inflation at 4% during 2011, giving us a guidepost for whether the bank will be more aggressive or passive as we move forward throughout the year.

Chinese authorities have been tightening monetary policy - by raising reserve bank requirements and the benchmark interest rates. While more tightening is expected regardless, today's data suggests that the bank of China may have to be even more aggressive.

Commodity Currencies and Gold Fall Back in Today's Trading

The news was therefore taken poorly by commodity currencies like the AUD, NZD, and CAD.

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Here's a quick glance at the AUD/USD pair. After rallying most of the week, we topped off around the 1.0070 area, and in the Asian session, in the wake of the news, the AUD slid down to 0.99.

Commodity currencies were weaker against both the US Dollar and the Euro. Global equities were generally down and both gold and oil fell back, pressuring that commodity bloc of currencies.  With gold erased its rally from the first half of the week, falling down to $1356, from $1371 at its peak today, the USD may be in the driver's seat for today's session.