China's economy has started to spur some serious inflation and their government knows it. They're trying to "tap on the brakes". They've raised the bank reserve requirements in order to squelch a lot of the lending to businesses and consumers alike. They're trying to prevent a real estate bubble at the same time. So they've got to do something...and fast!

The latest data shows that they've still got a lot of work ahead of them too. There is quite a bit of inflation at the Producer (PPI) and Consumer (CPI) level as you can see from the chart below. 

Even China's Retail Sales are continuing to soar and that's not going to help what they are trying to accomplish right now (which is an economy that needs to slow down).

Now, here's the bad part. In the past months when China started "applying the brakes" through the raising of the bank reserve requirements, their stocks have now started to show it by breaking down. Check out the daily chart of the Shanghai Composite Index below.

Therefore, watch to see if this bleeds over into other financial markets. If other stock markets start to fall, then the USD and JPY will likely come to life even more as the defensive plays emerge. If this stock sell-off remains contained, then the market will trade off of its fundamentals which will benefit the Canadian dollar and the New Zealand dollar since they are the next two countries that are nearing their interest rate hiking cycles.

Sean Hyman
Editor - The Currency Cross Trader
www.worldcurrencywatch.com