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• Chinese data underscores economic undercurrent.
• RBA minutes hawkish on the AUD.
• Brief flight of risk appetite after Goldman Sachs announcement.

Data out of China last week was particularly strong and better than economic estimates, with the country growing at 11.9% for the first Quarter of 2010. The Chinese government have invested USD586B in fiscal stimulus for housing, power and transport infrastructure which has provided for significant demand for Australia’s iron ore. These figures however have prompted speculation that the Chinese government will hike interest rates and allow the Yuan to appreciate. Both of these actions will curb pressure on inflation and are negative for commodity currencies like the Australian dollar. China last week announced that it was tightening restrictions on banks when providing loans for third-home purchases and low-doc home loans to reduce the risk of a housing bubble forming. Currently, inflation in China are well within the 2-3% target band.

The RBA minutes this week reflect the undercurrent of pressure on them to hike interest rates not just to achieve more “normal” levels but due to the prospect of above trend growth as generated by the resources boom. The board had not focussed on the mining boom in the past however it was quite explicit when it acknowledged the elephant in the room and stated that “terms of trade was now likely to be noticeably stronger than had been expected”. Since the minutes were released, the interbank futures have risen significantly and the probability of an interest rate hike in May stands at 39%.

On Friday last week, the AUD weakened heavily after it was announced that the SEC was suing Goldman Sachs for fraud. The company’s share price then free-fell 13 percent prompting a sharp drop in equity markets and a flight from riskier assets. It had been generally regarded that the Investment Bank behemoth had emerged stronger and with its reputation brighter after the GFC and market cynics including Gordon Brown were quick to push for answers. Gordon Brown, who is currently in the fight of his political life noted he was “shocked” and referred to it as “moral bankruptcy”. The civil action prompted some downward revisions on the local currency, however the S&P500 has rebounded 1.26% this week and the Aussie has followed suit and is now close to a five month high against the USD whilst continuing strong gains against the EUR and JPY.