It’s a miracle. Manufacturing activity in the world’s second largest economy actually improved in October. The figure showed the first sign of expansion in more than a year. But is this for real and how can this be exploited in the currency market?
According to the release published by HSBC/Markit Economics, Chinese manufacturing activity showed the first expansionary activity since October of last year. For all of this year, the index had been averaging 49.7, below the minimum benchmark of 50 considered to be a positive for the economy. However, for October, the index jumped to a reading of 50.4.
The headline index figure was driven higher largely by an increase in output for the month. The survey’s subcomponent report showed a reading of 51.3, jumping up from aprevious 48.2. Additionally, after falling for the last six months, export components showed a positive monthly improvement. Those figures rose to a 52.4 reading. Ultimately, today’s report– and its underlying details – show that the Chinese economy is on its way to a recovery. The notion boosts speculation that gross domestic product for China could be as high as 7.7%, slightly higher than earlier estimates of a 7.5% annualized increase.
The higher bout of activity in the manufacturing sector also solidifies the fact that the country is unlikely to see further monetary easing. Remember, the People’s Bank ofChina, and the recent government regime, focused on getting the sector and overall economy back on its feet. Today’s report shows that recent monetary stimulus is working and will likely be unnecessary in the near term.
Usually in this instance, market relationships dictate that the Japanese yen should be the currency pair to trade. But, given the political and monetary instability in Japan, it’s not likely the yen will respond any time soon.
This places the EURAUD in plain sight. Australia will directly benefit from a China recovery, lifting the Australian dollar. And, given the instability in Europe, the trade makes sense.
Technically, the cross pair remains in a downtrend, with the1.5454-1.3800 descending trendline likely to fortify resistance at 1.2850. A failure to overtake this major level could precipitate a decline to well below the 1.2000 round figure.
Source: FXTrek Intellicharts