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Australian Dollar Vulnerable to China PMI Disappointments

Australian Dollar Vulnerable to China PMI Disappointments

David Cottle, Analyst


Talking Points:

  • China’s official and private purchasing managers indexes are due this week
  • Neither is expected to shine with seven month lows expected for both
  • However, investors in China plays should be wary of disappointments

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Moody’s unexpected hack at China’s credit ratings last week has put the world’s second largest economy in uncomfortable focus and with it China growth plays such as the Australian Dollar.

Admittedly the rating agency’s worries were not particularly pressing. Its concern was that over time Chinese growth may slow and that its rising debt profile would present Beijing with ever more difficulties.

Still, there does seem to be an increasing sense in the market that China’s growth may now start to decelerate, having grown quite nicely through 2016, and that the first quarter of this year may prove its high point. Indeed, China’s authorities themselves expect as much. Their 6.5% target for this year is lower than 2016’s actual 2.7% rate. That was a 26-year low.

We will get a look at two major signposts along the road this week, in the shape of official and private Purchasing Managers Indexes for the manufacturing sector in May.

For those not acquainted with these, they’re held to be among the more timely data of the global round. They also distil many complex economic events into one, easily tradable number. A print above 50 means the sector expanded, a print below that means contraction.

The official PMI due on Wednesday is concerned with large firms which often have heavy state involvement. It is expected to have slipped only a little to come in at 51.0, a whisker below April’s 51.2. This doesn’t look too bad but, all the same, an on-target reading would be a seven-month nadir.

The private, Caixin PMI will be published on Thursday. This is expected to remain in expansion territory but only just. The 50.2 print expected would see this index, too, flirting with seven-month lows.

As expected outcomes need not be too bad for China plays such as the Australian Dollar. They are probably in the price now. However, investors probably do need to be wary of disappointment here. Admittedly signs of more rapid deceleration may see Beijing switch its focus from deleveraging and regulation to growth again in short order.

But as Moody’s has reminded us, any delay in getting to grips on debt will also have its downsides for China.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.