AUD/USD traded higher on a stronger HSBC Manufacturing PMI (Flash) during early Asian session, with the highest in 6 months print pushing AUD/USD to a high of 0.9438. This makes perfect fundamental sense, as a stronger than expected China manufacturing sector will be expected to import more commodities from Australia, helping to sustain the battered economy. Incidentally, the Australasian Institute of Mining and Metallurgy stated that Mineral Sector unemployment in Australia has grew to 11% vs 2% one year ago. Having more mineral/metals demand from China will be a direct boost to the declining mining sector of Australia and drive AUD/USD higher up in the short-mid term even before considering the bullish impact the positive trade balance will bring.
However, questions remain – does the stronger than expected PMI numbers an indication of longer-term recovery of China and by proxy Australia’s mining sector? Firstly, September’s flash numbers stood at 51.2, which is only really bullish if we consider that PMI numbers have been below the 50 par mark (implying shrinkage) from April to July. August PMI signaled the beginning of the turnaround by coming in at 50.1, barely above the par level. Hence we can regard this latest 51.2 print as a continuation of the recovery narrative, suggesting that China may be getting out of the rut it has been in since the “hard landing” last year.
The problem with this interpretation is that we’ve precedents where such promising signs of recovery turned out to be fluff. We only need to look as far back as early 2013, where China Manufacturing PMI grew to 51.9 in Jan and followed by 51.7 in Mar, only to be followed by the 4 months of shrinkage. This could also be said of early 2011 when the same scenario happened. As such, it will be highly optimistic to think that the slowdown in China has stabilized and a recovery is in play right now. In fact, Chinese officials have been saying that this slowdown in China is expected to last for a few years, and hence what we are seeing now has a high chance of being a mere small cyclical volatility and not a reversal indication.
From a technical point of view, it is also important to note that price has failed to overcome the soft resistance of 0.943, indicating that the bearish pressure from post FOMC rally remain in play. Furthermore, it should be noted that bearish pressure were already underway during early Asian session, where price failed to truly clear the 0.939 ceiling in the first few hours of trade prior to the PMI numbers. Currently Stochastic readings continue to point higher, but considering that current levels are close to the flat consolidation “resistance” zone found on 16th Sep, it is possible that Stoch readings will be able to pull lower from here, giving us a confirmation of a bearish move towards Channel Bottom.
Prices on the weekly chart is more bullish with a break of the 0.933 consolidation channel ceiling. However, the inability by price to breach the 0.95 level is disconcerting. Stochastic readings on the weekly is similar to the ones of Hourly Chart, where the likelihood of Stoch curve reversing from here is there due to precedents. Furthermore, even if price manage to breach the 0.95 level, it is difficult to imagine a continued bullish action towards parity given that Stochastic readings are close to being Overbought. Hence, long term technical outlook kind of agrees with the fundamental outlook – where price may still look bullish for now but heavy bearish pressures remain.
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