PBOC reluctant to cut rates even with low inflation.

The question isn't whether or not China's central bank can lower rates, it's whether they want to.

The Chinese CPI report is due at 0130 GMT but almost certainly won't indicate an inflation problem. The consensus estimate is for prices to rise just 1.3% y/y in March, down from 1.4% the month before.

That's the kind of reading that would trigger easing from most central banks but China is at a delicate time in its development. Leaders are trying to shift from an investment and export driven economy to a consumer-driven one. It's a monumental undertaking and it requires some tough decisions. The biggest one is scaling back the easy credit throughout the economy.

The government has been trying to use targeted measures to curb excesses, especially in real estate but debt-laden local governments are also feeling the squeeze. Meanwhile, the PBOC has eased in the past six months but only modestly and the latest declines haven't sparked a response.

China CPI

Analysts expect a cut in the deposit rate this quarter so a move could come any time but for a cut in the RRR it may be tough to convince officials with CPI. It was lowered by 50 bps in February for large banks and was the first cut since 2012.

At the end of March, one economists predicted an RRR cut on April 15 after Q1 GDP data is published. Also in late March, PBOC leader Zhou had this to say:

"Inflation in China is also declining. We need to have vigilance if this can go further to reach some sort of deflation or not," he was quoted as saying. But that came shortly after Zhou warned that China could undermine reforms if it adopts excessively loose monetary policy.

Like many other countries, China sees low inflation as temporary and driven by declines in commodity prices.

Generally, low Chinese CPI would give a boost to the Australian dollar on easing anticipation but with China backing off of investing in infrastructure, demand doesn't flow from China to Australian mines.

How to trade it?

If the Australian dollar rallies on a low CPI reading, give it a bit of time and then fade it.