China Raises Interest Rates! How it will affect grain prices next week.
Dec 25, 2010
I just wanted to let everyone know that China celebrated Christmas by announcing a 0.25 interest rate hike. I have been telling you for weeks it was coming, I just don't think anyone, including myself thought it would come on "Christmas". The Chinese certainly have a knack for flare these days...This is just the second rate hike in the past three years, and certainly worth paying attention to. If you remember, the last rate hike rocked the commodity markets on a short-term basis.
I am still not certain how this news will be interpreted or exactly how it will affect grain and livestock prices Monday morning. It is still too early to call, but I would have to guess the market will see a knee-jerk type sell off at first, meet by heavy end user buying on the breaks. You just never know though, many traders will see the 0.25 cut as minimal and will feel somewhat relieved that is it behind us. Some of the big boys were worried that it could have been much more significant. Obviously the market had already priced in more rate hikes form China, the timing though may throw a few of the big players for a loop.
The bears will certainly claim it solidifies China's quest to stop at nothing to slow their ever surging economy. I do agree that this cut will certainly be viewed as a more "bearish type cut" than compared to one that would have come in early 2011. A rate hike before year-end will have a more tightening impact, as the interest rates on the medium and long-term loans, as well as the deposits are reset at the beginning of each year according to the base rates.
No matter what the initial reaction is, large global traders will be eager to see if the Chinese economy will be able to continue to grow at it's current pace in the face of further tightening. If China's economy shows any signs of slowing down and or loosing steam, large traders will quickly cash in their winnings and abandon their "long" commodity trades as they begin to fear demand for Crude Oil, Soybeans, Cotton, and other commodities will soon fall. I personally think China's economy is resilient enough to withstand this rate hike and several more that may be headed their direction. I guess only time will tell.
China is obviously digging in for what looks to be a very long battle against inflation and serious price increases. I still believe the root of their inflationary problems stems directly from their domestic supply shortages. Once they realize the rate hikes are only acting as temporary bandaids, I believe China will have no choice but to import goods and raw materials in massive quantities to slow the rising prices. When this happens commodity prices should soar. I don't think it is a matter of "if' this will happen but "when" this will happen.
It will certainly be an interesting week ahead with many traders on vacation until the start of 2011. Lower than normal volume and several "outside market" developments are sure to take us on a roller coaster of a ride.
Rate hikes in China, and more news regarding European debt will not be the only thing affecting our grain prices. Make sure you keep your eye on the military action over on the Korean Peninsula. South Korea decided to give North Korea a taste of their own medicine by holding a massive artillery drill on Yeonpyeong Island a few days back, as you can imagine it has North Korea all worked up. South Korea decided to top that off by conducting another one-day exercise on Dec. 23rd involving jet fighters, mobile artillery and about 800 troops. North Korea is yet to retaliate, but were quoted today using the word "nukes" in several sentences...if things did not slow down. You and I both know the markets do not like hearing words like "nuke" or any context of the world "nuclear war" come out of anyones mouth. If the market gets spooked enough traders will swarm to the US Dollar for safety and strength. This will definitely not help those of us looking for higher grain and livestock prices.
I should know more Sunday night after the markets in China open up...I'll keep you posted.
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