There is a lot of anticipation ahead of China’s May PMI readings, particularly given its effect on commodity currencies. After the blowout first quarter GDP results, markets are now at least hoping China’s economy will continue its rebound. That would keep up the price of oil, steel, gold and copper. The latter recently hit a new all-time high and could keep supporting emerging currencies.
May is the midpoint of the second quarter, and the PMI figures give us some pretty good insight into how the economy is doing. Particularly if the growth earlier in the year is being maintained. The growth of China’s economy has fueled general optimism in the markets which naturally supports more risk-on plays in the forex sector.
What to Be On The Lookout For
China’s official PMI survey is carried out by the National Bureau of Statistics (NBS) and has been lagging its private counterpart recently. But that changed with the new quarter, as optimism among big Chinese businesses resumed and both services and manufacturing sectors moved back into expansion. Investors are hoping that the trend will continue, with both readings above 50 likely to keep risk appetite going strong.
Chinese NBS Manufacturing PMI is expected to come in slightly lower than the prior month at 50.2 compared to 50.4. Given the importance of China in global industry, this is often the most important data point for forex traders, particularly of commodity currencies. But the growing service sector in the Asian giant has also increased interest from high-tech export economies, as China buys a substantial amount of goods from Japan and Germany for its domestic market. Chinese NBS Non-manufacturing PMI is expected to remain unchanged and in expansion at 51.2.
Internal vs External Markets
The private measure of PMIs from China is carried out by Caixin, and it tracks a larger number of smaller, more export oriented companies. For this reason, the Caixin Manufacturing PMI survey is often seen as a proxy for global economic health, particularly of large consumer economies such as the US and Europe. The rebound in China’s GDP is seen being supported by expected smooth sailing in the large export destinations.
The US economy has been particularly resilient, and is expected to grow in the second quarter. That would likely be reflected in growing imports from China, supporting the Caixin manufacturing index. A similar story can be gleaned from the expected rebound in the EuroZone economy, which would keep the ECB on pace to cut rates soon. Caixin Manufacturing PMI is forecast to improve slightly over the 51.4 reading of the prior month. That would affirm the differential between the slower growing large companies in China compared to the smaller, more agile, export-driven ones.
Of course there is always the possibility that markets could end up being disappointed, and if any of the PMI figures drop back below 50, it could hurt risk sentiment. That could provide an unexpected drag on the Aussie and weigh on the Euro as it would likely be seen as a sign of slowing global economic activity.
