Release: China HSBC Manufacturing PMI (Flash Mar)
Date/Time: 03/21/12 10:30 PM ET (02:30 GMT, 03/22)
News from China Pressures Commodities in First Half of the Week
The comments from BHP Billiton regarding softening demand in China for Australia’s iron ore sparked risk aversion in financial markets and pressured commodity currencies in Tuesday’s session as it renewed fears that the Chinese economy will slow at a faster rate than anticipated.
This follows softer fundamental data earlier in the week from the housing sector – that housing prices in key cities continue to fall and pronouncements by government officials that curbs on housing speculation will remain in effect. It adds to other troublesome signs such a large trade deficit, as well as falling foreign direct investment.
With the focus squarely on China’s outlook and the impact that may have on commodities attention should turn to the preliminary release of the HSBC manufacturing PMI set to be released on Wednesday evening, 10:30PM ET (Thursday morning, 02:30 GMT).
China Manufacturing PMI’s Outlook
The last 3 months of this reading have shown manufacturing contracting, though the pace of contraction has been slowing. In February, the HSBC reading came in at 49.6, just shy of the 50 level separating expansion and contraction.
From Reuters: “The HSBC Flash China Purchasing Managers’ Index (PMI), an unofficial reading of manufacturing activity in the giant economy out on the same day, is also expected to point toward a slowdown in growth though this index is rising from a low base.”
The pace of activity in the Chinese manufacturing sector will be important for the prices of commodities and for the commodity currencies that rely on China to import their goods – mainly Australia and New Zealand. That is because much of the spare capacity for commodities has come in recent years from China and if it pulls back than commodity prices will face a significant headwind.
If the manufacturing PMI gets back above 50 it can help to stabilize markets which have responded negatively to the news and data out of China so far this week. It would show that despite a general slow down in the economy, the manufacturing base is back to posting growth. It can even help to spark some risk appetite, thereby boosting the AUD and NZD against safe haven rivals.
For an idea on how to trade the recent divergence between China’s vs US growth expectations see: AUD/CAD – Playing the US vs China Growth Story
Still, the trend is unmistakable, and the recent pronouncements by the Chinese authorities that they will be shifting their economy from one dominated by residential investment and exports to one that favors domestic consumption should show that the manufacturing base is likely not to recover to pre-crisis levels.
A reading below 50, and one that shows contraction picking up (49.5 or below) would only further the theme that China’s economy growth is decelerating and that could spark yet another round of safety seeking behavior be investors, undoing some of the gains in equities and increase in bond yields seen in the past 2 weeks.
Chinese Stocks and Copper Reflect This Pressure
China’s main index – the Shanghai Composite – already reflects concerns about China’s growth as it has topped off in early March, and begun declining.
A break through recent lows, and the 50-daily EMA which has been acting as support, would open up further downside risk.
Copper – a key commodity in the production process similarly reflects this pressure as it trades in a range throughout February and March unable to push above a recent downward sloping resistance trendline and horizontal resistance at 3.9450.
We have been monitoring this range for a break to either side, as well as the behavoir of price as the 50-daily EMA crosses above the 200-daily EMA usually a positive technical indication. So far the key industrial metal continues to show ranging conditions, oscillating around the longer term moving average, while the RSI has kept to its mid-level near 50 as well.
Another important index to follow would be the Dollar Index, you can see the latest technical analysis of it here: USDollar Index in Pullback After Poor Outlook on Chinese Demand
Will we see further topping off in both of these markets? With the fundamental docket quite this week, the HSBC manufacturing PMI data takes on considerable more significance, and can create the catalyst for a move one way or the other.
A weaker reading could create the conditions for USD and JPY strength to reemerge, especially against commodity currencies. A reading showing expansion can calm fears and stabilize sentiment if not bring a rebound in the AUD and NZD crosses to end the week.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.