Forex Trading Library

Why Upcoming Chinese PMIs Are Important

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Over the weekend and on Monday we have a couple of important economic events coming out of the Far East.

The Purchasing Managers’ Index (PMI) is a survey of company executives, asking how they see the current business situation and how they expect it to be in the next three months. This helps us understand what their purchasing trends (among other things) will be.

In the case of China, as the world’s largest importer of commodities, what its companies are thinking is especially relevant to commodity currencies. Australia, New Zealand and Japan all have China as their largest trade partner. The current economic doldrums in Japan are largely attributed to the drop in demand for machinery and cars from China. So, even if you don’t trade the CNY, what happens in China is likely relevant to a large number of currencies.

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The Upcoming Surveys

We get the official Manufacturing and Non-manufacturing PMIs early on Sunday while the markets are closed. This means that we don’t get a reaction to the data until later in the day. Then we get the private Caixin survey for manufacturing on Monday. Both have a habit of moving the markets since while they measure the same thing, the difference in the methodology of the survey provides extra insight for the market.

The NBS PMI survey has considered a smaller number of businesses, with a focus on large, state-owned enterprises. They tend to be less agile in responding to market changes. And, often, their policies reflect the government’s interests more than even their own profitability.

The Caixin survey goes out to a much larger number of companies, with a preponderance of small, privately held companies. They are said to be more domestically oriented, and able to handle market distortions. We could explain the difference between the two surveys by the effects of the trade war.

What We Are Expecting

Projections indicate that the official NBS Manufacturing PMI will return further into contraction at 49.2. This is compared to 49.7 in the previous survey. Last month, there was a surprise improvement. So a drop of a few decimals is not likely to spook the market. Also, it’s still in the range where it could be seen as a technical contraction.

Expectations are for the NBS Non-Manufacturing PMI to remain comfortably in expansion territory at 54.3. This would also be an improvement over the 53.7 reported in the prior month. A result like this would be something of a relief to analysts since this indicator has taken a bit of a dive since March. This could be because of the effects of the trade war domestically, as well as a broader impact on the Chinese consumer.

On Monday, we can also expect the Caixin Manufacturing PMI to slip further into contraction at 49.6. This would be down from the borderline 49.9 in the prior month. Smaller companies have seemingly been better at weathering the effects of the trade war. A return to growth (if, again, just technically by a decimal point or two) would be positive for the markets. However, it would not necessarily be a blow-out.

The Effects

There has been a lot of uncertainty about trade talks over the survey period. This is likely to depress the results, even though over the last week or so, sentiment has somewhat improved. Trade talks have stalled and resumed so many times since the tensions began, that uncertainty is clouding all optimism.

In the meantime, the Chinese government hasn’t been as forthcoming with stimulus. But, also during this period, the yuan broke below the psychologically important 7.0 level. This level would facilitate exports and support profits for Chinese firms. On the other hand, that diminishes purchasing capacity for imports and is not good news for commodity currencies.

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