Negative sentiment towards China continues to translate into USD weakness

Price action was once again driven today by events in Asia Pacific hours, with Chinese Caixain PMI printing 47.3 vs. Exp. 47.1, now in contractionary territory. The official figure printed in line at 49.7, seeing its lowest reading for 3 years and the first contraction in 6 months. These figures caused Asian equity markets to trade lower and as a result saw safe haven flows in JPY, with flows pushing the pair below the psychologically important 120 handle. Strength in JPY continued throughout the European session, aided by weakness in EUR as a host of weak European Manufacturing PMIs emerged, subsequently seeing EUR /JPY break through its 100 DMA.

Today’s negative sentiment regarding China continues to translate into USD weakness as market participants increasingly view a September rate rise as less likely given the back drop of weakened global demand and increased volatility, despite the less dovish than expected comments seen over the Jackson Hole conference, particularly from Fed’s Fischer. However, the aforementioned weakness in European PMI data allowed the USD to regain some ground during European hours, but still ended the session firmly in the red.

Elsewhere in FX markets, commodity currencies fell with energy complex which failed to maintain the levels reached after an 8% surge yesterday, with the notable exception to this being USD/CAD. This was due to GDP figures beating expectations with the M/M figure coming in at 0.5% vs. Exp 0.2%, and as a result USD/CAD dropped 70 pips. However the Q/Q showed -0.5%, althoughbeating expectations, this still saw Canada officially enter a recession.

Looking ahead tomorrow sees Australian GDP, which could give market participants a clearer picture of just how much the Chinese economy is slowing, while ADP employment figures and factory orders out of the US will also take centre stage ahead of a potential Fed lift off.