Australian Dollar, China Manufacturing PMI Talking Points:
- China’s manufacturers faced a tough May
- Output contracted after only two months of expansion
- The Australian Dollar slipped, but was already pressured and didn’t fall much further
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The Australian Dollar took a knock Friday following news that Chinese manufacturing output declined once more in May after just two months of recovery.
The official Purchasing Managers Index came in at 49.4, a six-month low. In the logic of PMI releases a figure above 50 is required to reach expansion territory. Any print below that is therefore bad news.
The non-manufacturing sector did better. Its PMI came in at the expected 53.4, matching April’s number. However, the fate of manufacturing is likely to be much more closely linked to current heightened trade tensions with the US and so weighs more heavily on market minds.
The Australian Dollar can act as investors’ favorite liquid China proxy and certainly seems to have done so on Friday, slipping after the numbers.
However, the effect of the data seems likely to be relatively brief as AUDUSD has already been sliding hard this year as trade conflict has intensified. Bear in mind that some hoped for a trade deal between Washington and Beijing by the end of May. Those hopes are now in ruins.
So AUD/USD was already essentially at its 2019 lows, if the intraday trading range of January 3 is discounted. Moreover, Australian interest rate futures markets now unambiguously price in two quarter-point cuts to the record low 1.50% Official Cash Rate over the next eighteen months.
Given the weaker external environment emphasized by this PMI data, and the lack of either inflation or interest rate support at home, it remains extremely difficult to be anything other than pretty bearish about the Australian Dollar’s prospects this year.
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— Written by David Cottle, DailyFX Research
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