(eToro Blog) Here it is, early June, and markets are already wondering when they can expect the announcement from the People's Bank of China about an interest rate change. Given that the Chinese central bank has a penchant for making the announcement during a banking holiday, it's quite possible that on the opening day of the Dragon Boat Festival, which begins today, some announcement will be made.

Whether that announcement heralds a rate increase, though, isn't entirely certain. Clearly, some economists and analysts expect that the People's Bank will continue to with their hawkish stance. Even the official news agency of China, Xinhua, believes that a rate hike is likely, citing their analysis that inflationary expectations remain elevated, and that the CPI will show a rise to 5.43% in May, and forecasting a 5.95% rise for this month.

While not at odds with that analysis, there are other factors at play which may have more of an impact on the Chinese economy. Specifically, the slowdown in the country's manufacturing sector. last week, the release of China's two key PMI indicators showed slow growth; the HSBC Manufacturing PMI fell to 51.6 from 51.8, while the Chinese Federation of Logistics and Purchasing's PMI Index fell to 52.0 from 52.9.

It was also recently reported by Japan's Komatsu, the second largest manufacturer and supplier of construction equipment, such as hydraulic excavators, mining equipment and wheel loaders, that China's construction rates were lower last month, down at least 5% as compared to the same period a year ago. May's decline follows a 5% increase in March, and a 3% increase in April.

Rates Are The Key - During a recent interview with an economic advisor to the Chinese government it was learned that there is already discussions of possible rate cuts by the end of the year. A Credit Suisse analyst agrees that a slowdown in growth is more worrying now than price pressure. So while markets are factoring in a rate hike, they may be in for a surprise.

One must remember that although investors are overly occupied with the debt woes in Europe and the crisis in the US eventually the one factor that allowed the global economy to recover and overcome difficulties is demand from China. It is also evident that once china began to tighten the global economy slowdown as well and riskier assets where hit. Since demand is closely liked to rates in china , lower rate outlook is positive for global demand. Higher global demand is positive for risk assets such as Aussie Kiwi , indices and even the Euro and the Sterling and . It is also negative for safe havens such as the Yen and the Dollar which tend to lose move into the sell side once risk appetite recovers. Hence a surprise from china could boost the bullish trend and get the global recovery gradually back on track.

Regardless of what happens, expect volatility among the Australian and New Zealand Dollars, the Yen as well as the common currency Euro, given that they are key trading partners with China.

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