Archived IMT (2010.09.12)

The CHINA-EUROZONE DUO is due to make a comeback to the markets after a 4-5 month absence. China was worried about excessive lending, now has inflation added to the mix. Eurozone was worried Spain and Portugal, now has Ireland and Greece back to the mix. Recall the period elapsing Feb-May when markets alternated their attention span between credit downgrades of the PIIGS and Chinese tightening measures (hiking reserve requirements and clamping down on bank lending). Saturdays release of China August CPI showed a 22-mth high of 3.5% y/y, further placing deposit rates deep into real negative territory. Rising inflation means China has a new reason to tighten policy, but this time could mean raising rates, which would have a more punishing impact on global risk appetite than raising the reserve requirements. As you should expect to hear more about Chinese tightening and concerns with Greek/Irish debt, the forex impact should provide fresh support for CHF and JPY.