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Dec 20, 2014

08:34 PM EDT


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Home » Technical Analysis » Preview: China’s HSBC Manufacturing PMI – Next Key Risk Event for Sentiment & AUD/USD

Preview: China’s HSBC Manufacturing PMI – Next Key Risk Event for Sentiment & AUD/USD

Release: China HSBC Manufacturing PMI (Flash Feb)
Previous: 48.8
Date/Time: 02/21/12 09:30 PM ET (02:30 GMT, 02/17)

China’s Flash Reading of Manufacturing Activity Next Key Risk Event for Sentiment

Following all the waiting and anticipation for the announcement of a 2nd Greek bailout agreement we see the market generally retracing some of the recent “risk on
conditions to begin the trading week.

This is quite evident in a pair like the AUD/USD which after surging higher to begin the weekend following the move by China central bank to cut its reserve ratio requirement has retreated below its Friday lows, moving towards the bottom 3rd of its recent range (see chart below).

US equities have also retreated, closing the opening gap from the weekend in the S&P500 futures (ES) contract (as seen to the right).

The general market response to the announcement of the terms of the second Greek bailout as well as private bondholders write-downs was a “buy the rumor, so the fact” reaction.

However the fact that nations did come to some resolution argue that this development should help risk sentiment and not dent the risk rally seen since the beginning of the year.

Therefore, the markets are going to be looking for the next important catalyst to determine sentiment.

That catalyst may come from the release of China’s HSBC preliminary version of its February manufacturing PMI.

The report carries important weight for higher-yielding commodity and growth linked currencies such as the Australian and New Zealand dollars. That is because China’s growth and demand for those countries commodity exports depends on activity in the manufacturing sector.

 

After 3 Months, Can Manufacturing Activity Return to Growth

Recently the HSBC manufacturing PMI has been registering readings below the 50 level separating expansion from contraction – with January’s level coming in at 48.8.

That was the third month in a row that this index was in contractionary territory. The HSBC index more closely follows smaller manufacturing firms while the official government version (released by its China Federation of Logistics and Purchasing office) is better at tracking larger firms. The government’ version has managed to remain above 50 level both in December and January.

Chinese authorities have become more concerned about weaker growth as export figures for January showed a negative year-over-year change and as we mentioned above they responded by cutting their reserve ratio requirement, which should help induce increased lending by Chinese banks.

For more on China’s fundamental picture see the fundamental update: China Pulls Trigger on RRR Cut, Should Help AUD & NZD

If the HSBC manufacturing PMI rebounds and is able to climb above the 50 level – joining the government CFLP version in expansionary territory – that will be a positive for risk sentiment and should help to bolster Asian equities as well as commodity linked currencies with the focus on the Australian dollar.

If however the reading stays in contractionary territory and if it falls below the level registered in January (48.8) it could work as a negative towards risk sentiment working to push down Asian equities, S&P 500 futures, commodities and the AUD.

There certainly is concern about the pace of China’s growth in 2012, but with further easing expected by Chinese authorities it should lay the groundwork for the theme of a “soft landing.” A negative surprise however would imply that more action is needed. Chinese stocks, responding to the shift in policy from one of battling inflation to one of supporting growth have rallied to an 11 week high.

 

Can Chinese Data Bring AUD/USD Out of Recent Ranging Conditions?

Looking at the AUD/USD pair we continue to be confined in sideways ranging conditions with support coming in at a zone between 1.0627 and 1.0650. Resistance comes in at 1.0775 and 1.0815.

A positive reading from China could help the pair move towards the top third of its range from the last two weeks, retracing the losses seen over the previous two trading sessions and if “risk-on” sentiment catches on we would have to monitor to see if the Aussie could pierce its recent highs.

A negative reading on manufacturing would be a negative catalyst for the Aussie and could cause it to test its range support. A break of that support would mean a break of the 21-daily ema (in red) and if risk sentiment remains negative could open up downside targets (1.0470, 1.0350) as it would likely start the beginning of a more pronounced retracement in the pair.

For a look further at Australia’s fundamentals factors see our fundamental update: Preview: AUS Employment Change – Key to AUD/USD & RBA

For a further technical analysis look at the AUD/USD see today’s technical update: AUD/USD Fails to Confirm Bullish Breakout and is Back in Consolidation

 

 

To gain free access to live market intelligence briefings where we  discuss risk and trade management as well as the fundamental backdrop for key currency pairs, register here at IBTrade.

Nick Nasad is an analyst, educator, and trader; 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.

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