A Positive Manufacturing PMI Surprise from China?

Last week I touched upon trends in global manufacturing PMI data, and today we get fresh updates, starting with a positive read from the world’s second largest economy: China.

What’s the Score?

There are two version’s of the manufacturing PMI number, China’s official survey results (50.1 vs. 49.7 forecast, 49.9 previous) from the government and the HSBC manufacturing PMI survey data (49.6 vs. 49.3 forecast, 49.2 previous).  Both came in above expectations and previous reads, although the more closely followed HSBC survey showed that China was still showing contractionary conditions due to a decline in total new businesses and continued job shedding.  The one positive from the survey report was that deflationary pressures were easing, but it was only a small silver lining as those cost savings were passed on to clients to attract new businesses.

How does this affect sentiment on China?

China’s manufacturing PMI data has been steadily grinding lower since hitting a top at 51.7 back in July 2014.  And over the last few releases, both the official and HSBC survey results dipped into contractionary territory, adding to the broad fears that China’s slowdown is the real deal, including the possibility of deflation reaching its shores.

Being the world’s second largest economy, of course a slowdown in China brings about fears of a global economic slowdown and the possibility of financial markets going into risk aversion mode. So, it’s welcoming to see somewhat of a step back into expansionary conditions and it shows that the recent rate cuts by the People’s Bank of China and lending growth may actually be providing support to the economy.

So the next question is, “is this the bottom?” One positive read doesn’t make a turn in the downtrend just yet, so we’ll have to get a couple more positive readings before we can call a bottom and turn towards the upside in manufacturing sentiment.  For now though, risk sentiment could be less negative, especially if we continue to get better-than-expected PMI manufacturing reads from other countries.

What does this mean for currencies?

When any economic news comes out from China, the Aussie is the currency to watch.  China is currently Australia’s largest trading partner where around 1/5th of everything Australia exports and imports is to/from China, so positive developments in China tends to spark Aussie buying, while we see the opposite when the news is negative. Broad risk sentiment also tends to be affected in the short-term because of China’s global reach, meaning moves are likely in the safe haven currencies (like the Japanese yen and U.S. dollar) during periods of China induced risk fear or confidence.

Today, from a session low around .7605, AUD/USD spiked higher on the release of the government PMI numbers at 1:00 am GMT to highs of around .7660, but pair wasn’t able to hold onto its gains after the below 50 read of the HSBC number (although the negative Australian building approvals data may have played a role in Aussie weakness).

Overall, it looks like the reaction seems to be short-lived because of the conflicting data, but if this is indeed the most negative manufacturing managers are going to get and this is the bottom, look towards the Aussie as one of the best forex trades to play any potential gains (or losses) off of Chinese data.