China’s May PMI figures were released over the weekend, beating estimates despite downward pressure from the Middle East conflict. The immediate market reaction was muted, though it could set up commodity currencies for further gains if China’s economy gains traction. The results have implications for other economies, as China is a major manufacturing hub, and the prices of its goods will affect inflation pressures in consumer economies like the US and the Eurozone.
The data came out over a weekend that saw rising market risk, offering a counterpoint to the global trend. The US and Iran failed to reach an agreement on the Strait of Hormuz, but negotiations continue. This effectively pushed the status quo from last week forward. It could reach a critical point in the coming days as major central banks hold monetary policy meetings, and without a deal to lower energy costs, could start a new hiking cycle. This puts commodity currencies at risk and makes them more reliant on good news out of China, the largest commodity buyer.
What The Data Points To
The difference between China’s official and private measures is notable, offering additional insight into how the economy is performing. The NBS measure tracks a narrower range of large, mostly state-owned businesses that are the larger consumers of raw materials, such as iron ore and coal imported from Australia. This measure fell to 50.0 from 50.3, indicating flat activity, and in line with expectations. However, there was a divergence between production, which rose, and new orders, which fell. This indicates that overseas demand is weakening and being replaced by growing domestic demand.
The private measure from RatingDog (formerly Caixin) was well into expansion at 51.8, above expectations. This measure includes a wider range of smaller businesses that are more export-oriented. While large firms showed resilience, smaller, more agile firms expanded despite weakening export orders. Both indicators showed a shift towards the domestic market, which would continue to prop up demand for raw materials even if export markets like Europe slow down in the current climate.
The Market Reaction and Outlook
The initial market reaction was muted, with a slight gain for the AUDUSD as investors were distracted by developments in the Middle East. However, the currency pair has been trending higher since the start of the year, and the latest data indicates that demand for Australian exports is solid. This allowed for gains even the CAD, despite slightly lower energy prices, as higher energy costs have not crimped demand from the world’s largest crude importer.
For the AUD in particular, markets are now looking to external factors, as the domestic situation seems to be going along with expectations. The RBA raised rates at its last meeting, as widely expected, and markets now expect a pause at the June meeting as the effects of the recent tightening filter through the economy. Since the RBA was already on a hiking track before the Middle East conflict raised prices, the potential economic drag could be slower. This might keep the AUD upbeat and help it outperform other commodity currencies as long as China’s economy remains resilient, as the most recent data show.
