FYI | Aug 01 2012
– China’s official PMI print disappoints
– Implications for policy
– Australia’s PMI is even worse!
– All eyes on the FOMC
By Chris Tedder, Research Analyst FOREX.com
It was a very eventful day for investors as they grappled with jumpy price action, big data releases and low levels of liquidity, whilst also attempting to position their portfolios ahead of tonight’s FOMC statement. Early on, the market was spooked by the possibility that the aussie overextended itself in the lead to tonight’s statement, causing AUDUSD to sink. The sell-off was compounded by a lower than expected headline Chinese manufacturing PMI figure, eventually sending AUDUSD to a low around 1.0460. At the same time as the aussie was falling the kiwi was rising, excluding the period immediately following the release of the Chinese data, which highlighted how nervous the relatively few investors that weren’t watching from the sideline were. However, the same nervousness kept the two main commodity currencies, AUD and NZD, well within their recent trading ranges against the dollar.
China’s official PMI print disappoints
According to the official Chinese PMI data, the manufacturing sector in the world’s second largest economy remains in expansion territory. But only just. The headline figure printed at 50.1, just 0.1 point away from the level that separates expansion and contraction and much less than the 50.4-50.5 that the market was expecting, thus reigniting calls for more easing measures from Beijing.
Implications for policy
But will the government risk stocking the property bubble by significantly ramping up domestic growth stimulus? Although we expect the government to continue to enact measures, including RRR and IR cuts, to support domestic demand, policy officials are hesitant to pursue a path that risks inflating property prices in its major cities even further, which would put even more strain on the Chinese economy.
But it is not all bad news. In fact, HSBC’s final manufacturing PMI figure, which was also released today, actually improved, printing at 49.3 vs. 48.2. Overall, we think that even without another stimulus the domestic economy will post an annual growth rate around 8% this year. Most importantly, the slowdown in exports, growth and the general economy has been much more restrained compared with 08-09. Hence, the need for another massive cash injection into the economy is much less.
Australia’s PMI is even worse!
In Australia, PMI fell at its fastest pace since the financial crisis. Astonishingly, AiG’s performance of manufacturing index dropped to 40.3 last month from 47.2 in the prior month (a number below 50 indicates contraction). If we took this number at face value it would paint a very grim picture of the future of Australia’s manufacturing sector, at least when compared with most other advanced economies. However, the index should be taken with a grain of salt as it is historically volatile. Nonetheless, today’s print does underpin the belief that the strong Australian dollar, rising costs and weak levels of global demand are weighing on the manufacturing sector.
Later in the session, Australia’s house price index printed at +0.5% q/q, much higher than the expected 0.5% decline. The data helped support a late rally in the aussie, but the push higher was mostly due to investors positioning themselves ahead of tonight FOMC statement. Nonetheless, the aussie was, unsurprisingly, kept from breaking any key resistance or support levels during the session as most of the market is focused on the US, with the rest looking towards Europe.
All eyes on the FOMC
As we previously stated, investors’ attention is squarely on the US as they await the release of the FOMC statement later tonight/early tomorrow morning. Overall, we are not expecting much from the statement, which may lead to some disappointment in the FX market on the back of the recent push lower for USD. But the market is also not expecting a whole lot until the Fed’s next meeting in September. So, any initial reaction in the FX market may be retraced shortly thereafter.
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