Commodity currencies got off to a stellar start on the back of renewed speculation the Fed would turn on the printing press again, before a very poor flash manufacturing PMI figure out of China reversed price action. The euro, however, was able to escape the choppy price action, and held a steady upward trend throughout the session.
Before the release of the Chinese data investors were quietly hopping for a 50+ figure, signalling China’s manufacturing sector is on a path to recovery. Instead, the flash PMI figure dropped to its lowest level this year, 47.3, sparking speculation the Chinese government will do more to boost domestic demand. The headlines are suggesting the government may cut interest rates and/or the RRR soon.
Whilst we agree with the premises of the argument for more stimulus - growth needs stimulating - the government is limited in what it can do. Beijing has a war chest of ammunition it can use to boost growth, but it has to be careful not to repeat the mistakes of the past. Specifically, if the government starts aggressively easing it risks stocking an already volatile property bubble which was a direct result of the massive amounts of stimulus Beijing pumped into the economy in response to the financial crisis. Furthermore, there is evidence that the recent RRR and IR cuts in China have started to hit the property market, albeit in a small way. Hence, with the problems this property bubble has caused the government, it will likely try to find a way to reinvigorate domestic demand without pushing up property prices, this doesn’t rule some RRR or IR cuts but does limit its options.
What are Beijing’s options?
Beijing is currently engaging in a form of policy easing that is more direct and less harmful to property prices than RRR cuts, which is selling reverse repurchase agreements. This is basically a contract whereby the government sell’s an asset and agrees to buy it back at a higher price. Overall, the operation provides a short-term boost to liquidity and can be used as needed, whereas reducing the RRR is more permanent and not as direct in boosting liquidity. However, RP’s are limited; the government cannot indefinitely keep selling them.
Another option for Beijing is to sit back and wait for other central banks to attempt to stimulate global growth. However, as today’s data highlights, time may be running out.
AUDUSD was sent through an important resistance level around 1.0520 early in the session, which triggered some stops and sent the pair to a high around 1.0546. Following the release of the Chinese data the pair almost immediately pushed back below 1.0520. Now it appears traders are keeping it around this area in the absence of any new data.
Nonetheless, the near-term future of risk assets will likely be decided by a slew of PMI data out of Europe tonight. Current estimates are mixed depending on what figure you look at, but French and eurozone manufacturing PMI is generally expected to improve slightly and German PMI is expected to print a little less than previous.