China HSBC Manufacturing PMI falls into contraction

Already this week, the USDJPY has declined to a two-week low at 116.928 with increased JPY demand being noticed as a safe-haven asset once again following the latest China HSBC Manufacturing PMI slipping into contraction. Investor appetite for safe-havens did not conclude with the JPY either, with Gold also bouncing to $1283 in the early hours of Monday morning. The announcement regarding such a key GDP contributor falling into contraction has once again reinforced anxiety that the economy in China is slowing down, while also fuelling speculation that the People’s Bank of China (PBoC) will need to issue further monetary stimulus. As the markets digest the weak PMI, stocks in Asia have suffered losses while the CNY has weakened to a near two-and-a-half year low with the USDCNY advancing to 6.2788.

Aside from concerns regarding the world’s second largest economy slowing down being the central focus to begin the week, the oil markets are once again attracting headline attention. After suddenly shooting to its largest daily advance in nearly two years following the unexpected news of a drop in US rig counts – providing an indication that producers are potentially responding to an aggressive supply surplus in the markets – the commodity is withdrawing gains on Monday morning. This is following workers at U.S refineries going on strike yesterday after contract renegotiations broke down. It was noted late last year that the industry in general faces an uncertain future and I think the news regarding a strike in the United States, alongside a summit taking place in Aberdeen to discuss urgent tax cuts after the slump in oil prices provides some validity to this.

The Aussie is attempting to bounce higher with the AUDUSD advancing to 0.7793 before a highly awaited Reserve Bank of Australia (RBA) interest rate decision in the early hours of Tuesday morning. With speculation rampant that the RBA are set to become the next central bank to join the surprise train and unexpectedly cut interest rates, investors have been pricing in an Aussie decline heavily over the past week which has resulted in the pair dropping from 0.8024 over the past couple of days. In regards to the possibility of an RBA interest cut, nothing can be ruled out after all the surprises we have witnessed from central banks as of late, although I personally think the RBA will possibly hold on a bit longer before cutting interest rates.

Australian economic growth is still progressing at an annualised 2.7% and although the economy is at risk to weaker commodity prices, it might make more sense for the RBA to understand what type of impact the drop in commodity prices is having on the Australian economic data before easing monetary policy. Not only this, but the RBA have repeatedly stated the need for interest rate stability and an interest rate cut could put an already-elevated housing sector out of control. Additionally, the Aussie has declined at such a rapid rate over recent months (nearly 18%) that this can provide weakening inflation levels with a boost. Although investors have priced in a potential RBA interest rate cut early, it’s more likely that the RBA will state this evening that its currency remains “overvalued” and has significant more room to move to the downside.

Other than the above, the markets are set to open the week with the USD continuing to trade higher against its counterparts. There was some disappointment when it was announced on Friday that the first estimate of the 4th quarter US GDP came in at a slightly slower 2.6%, however it was always expected that economic growth in the 4th quarter would slow following the outstanding 5% reading for the previous quarter. Anticipation is still high that the Federal Reserve will raise US interest rates this year, resulting in the USD remaining supported. The optimists are now just realizing that expecting a US rate rise around March/April was always a bit too ambitions, with the majority of expectations for the first US rate rise now being pushed back the second half of the year.

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