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The Global PMI and the Chinese Recovery

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Tomorrow will be a busy day for forex markets, as all the major countries report a key economic indicator: Manufacturing the global PMI. Usually, the trend in PMIs determines how risk sentiment goes for the day, which is why it’s closely followed by traders. But this time around there is more focus on China, and its fledgling recovery amidst the ongoing housing crisis and global trade slowdown.

The big European countries and the US already gave advance looks at their PMIs, so the expectation is for those preliminary figures to be confirmed. But this is the first time we see the data series out of China. The Asian giant is naturally crucial for commodity currencies like the AUD. But the recent surprise drop in the Japanese economy implies the figure can affect the yen as well. China is Japan’s largest trade partner.

Slowing Trade, Which Currency Moves?

In fact, China is the largest exporter in the world, and has been reporting dwindling trade for several months now. Not just falling exports, but also imports. Some analysts interpret this global slowdown in trade as a sign that the world’s economy is heading towards a recession. A few countries are already there, such as Japan and the UK. The Euro Area is teetering on a recession. Could the trade situation be a sign that the US will actually slip into a recession?

Given how the PMIs affect sentiment, it’s not a surprise that if there is an unexpected drop in the figures tomorrow, then the dollar could see gains at the expense of the Euro and commodity currencies. If there are signs that the global economy is doing better than feared, the boost to risk appetite could support the yen as well.

What to Look Out For

Tomorrow is a bit unusual in that both the official and Caixin PMIs for China will be released. The official (NBS) measure covers a smaller number of primarily state-owned, large companies. Meanwhile, the private measure includes smaller companies that are more export-oriented. That difference could explain why each produces different numbers, as the situation for each of the economic sectors is slightly different.

Chinese February NBS Manufacturing the global PMI is expected to remain just barely in contraction, with a technical improvement to 49.3 from 49.2 prior. A move above 50 would imply it has returned to expansion, and could give markets a substantial boost. The Caixin Manufacturing PMI is already in expansion, and is expected to improve by the same amount as the official, rising to 50.9 from 50.8 prior.

The Other Major Economies

There will likely be some focus on Germany’s Final February Manufacturing the  global PMI, after the preliminary figure fell substantially and unexpectedly. There is a chance it could be revised higher and end up cheering up the markets, while giving the Euro a boost. The expectation, though, is for it to confirm the drop to 42.3 from 45.5 prior. The Euro Zone is then expected to confirm its February Manufacturing PMI at 46.1, down from 46.6 prior, dragged by Germany’s result.

In the afternoon is the release of the US ISM Manufacturing PMI, which is expected to confirm the slight improvement to 49.5 from 49.1 prior. The figure is still in contraction, however, as the US economy continues to rely on the services sector for its growth. The lack of manufacturing dynamism, however, is keeping many analysts from declaring that the US is out of the woods yet in terms of a recession.

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