As markets begin to look to the weekend, there are several key economic data points scheduled for the Asian session tonight.  Although Japanese data does appear on the docket, it will be China’s consumer price report that takes center stage.  Why?

Consumer inflation in China has been the main focus for the government over the last two years.  This has been especially true as consumer prices vaulted to a high of 6.5% in July.  The higher mark has boosted stricter monetary policy – the raising of reserve requirements and restrictions on home loan amounts.  In turn, both policy measures, as well as economic conditions, have helped the country’s currency, the yuan to reach multi year highs against the US dollar.  The Chinese yuan hit a fresh high on Monday, rising to 6.3486 against the US dollar in the over-the-counter market – rising by 7.5% since June 2010.

Should the CPI report tonight show a rebound in the country’s prices, speculation will likely point towards further laxation of the China’s yuan trading band by Beijing officials – in order to deal with rising prices.

In August, prices actually slowed, rising by only 6.2%, versus expectations of another 6.5% annualized increase.  But, food prices remained the main culprit behind the supported rise as food prices – advancing by 13.4% in the month according to figures by the National Bureau of Statistics.  Pork prices, a main staple in the country, soared by double digits in the month as demand continues to outstrip supplies.  The 46% increase in pork prices forced the government to release subsidies and relax further supply provisions for the public in recent months.

So, with consumption usually peaking in both autumn and winter seasons, it may be no surprise that consumer prices beat current estimates of 6.1%, rising back to above 6.2%.

But, should consumer price inflation pullback even further – to 6% and below – this would spell a selling opportunity for the CNY, with Beijing officials likely to recant some of their previous strict monetary policies.