China PMIs may stir but not turn aussie higher

29 September, 2020

As markets grapple with the real threat of escalating virus cases derailing the global economic recovery, the risk-sensitive Australian dollar will be keeping an eye on the September manufacturing PMIs out of China on Wednesday. The NBS manufacturing PMI will be released at 1:00 GMT, followed by the Caixin/Markit manufacturing PMI at 01:45 GMT, both of which are expected to be one of the main highlights for traders this week.

Is China’s manufacturing rebound losing steam?

One of the factors that’s been working in the aussie’s favor in recent months has been the encouraging data coming out of China – Australia’s largest trading partner. Having come out of lockdown earlier than other countries, China is considered as being ahead of the global recovery curve and therefore its PMIs are being watched carefully for clues as to where growth is headed. The National Health Commission said in a statement earlier today that all new cases were imported infections involving travelers from overseas, in another sign that China has all but eradicated local transmissions of the coronavirus.

So far, the recovery remains on track. The Caixin manufacturing PMI is forecasted to remain the same at 53.1 as the preceding month. This reading was the biggest improvement in the health of the sector since January 2011.The official NBS non-manufacturing PMI for China rose to 55.2 in August, pointing to the fastest month of growth in the services sector since January 2018 as the economy recovers further from the coronavirus pandemic. It is predicted to fall to 52.1 in September, which may indicate a slowing recovery. The manufacturing PMI stood at 51.0 in August, creating the sixth straight month of increase in factory activity and is expected edge up to 51.2 in September.

Is the recovery speeding up?

China’s vast industrial sector is steadily returning to the levels seen before the pandemic, which paralyzed huge swathes of the economy earlier this year. Industrial production rose by 5.6% from a year earlier in August, the most since December 2019 as the economy recovers from the Covid-19 shock. The economy is set to expand 2.2% this year, which is the weakest growth in three decades, having grown by 3.2% in the second quarter year-on-year. Moreover, retail sales grew by 0.5% from a year earlier in August 2020, the first month of increase since December 2019. After several months, a good sign is coming up as consumers are becoming more confident, however, the slow progress shows the scale of challenge policymakers have to get consumption to pre-pandemic level.

Aussie tumbles to 2-month low

In FX markets, aussie/dollar has been in a strong selling phase over the last five days, reaching a new two-month low of 0.7005.

Should the China PMIs beat the forecasts, aussie/dollar might extend gains above the 0.7200 handle and the short-term moving averages. A bigger surprise in the data, may also open the door for the two-year high of 0.7412 and the 0.7490 resistance, taken from the high on July 2018.

Disappointing figures may increase speculation that the next move in price could be down, sending the pair towards the 23.6% Fibonacci retracement level of the up leg from 0.5506 to 0.7412 at 0.6858. Lower than that, eyes would turn to the 0.6800 handle before hitting the 200-day SMA at 0.6766.

However, with risk appetite looking fragile, any disappointment from the data could heighten concerns that the road to recovery will be a long one. Moreover, the US presidential debate may affect the aussie as well on Wednesday, as markets become increasingly wary about the upcoming elections in the United States.

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