FX Market to Look at Factory Surveys in China and Europe

China, Greece and the price of oil have been the three most discussed events this week in the forex market. The People’s Bank of China (PBOC) announced a cut in the reserve ratio for Chinese financial institutions, which boosted global stock markets as the central bank aims the move to spur growth in the slowing economy. Greek debt talks continue as the deadline approaches. There has been a lot of back and forth between lenders and Greek authorities with very little in terms of a way to reach a viable agreement. The government of Greece has already ordered all local governments to transfers deposit reserves at the central bank order to make the next debt repayment. The price of crude continues to rise as the market is pricing lower levels of oversupply that originally thought as well as the anticipated demand out of China as the increased liquidity has the desired effect.

Flash PMI to Pressure PBOC on Further Stimulus

The advance release of the Chinese purchasing manager’s index (PMI) disappointed last month as it dipped into a 11 month low with a reading of 49.2. The factory sector is struggling to gain traction after failing get back above 50 which would signal expansion. The forecast from economists was in the 50.6-8 range. The Chinese government has issued various statements pointing to a “new normal” for growth expectations. This is seen as a pre-emptive move ahead of failing to reach the 7 percent growth target for 2015.

A below forecast flash PMI of 49.4 would put further pressure on the People’s Bank of China to launch further stimulus measures to avoid the economy slowing down even further.

Flash PMIs to Show Again Europe in Two Speeds of Recovery
The European factory output expectations have risen after positive figures last month. There is no surprise to find Germany leading the charge. The reward for a consistent track record of beating expectations has been an upgraded forecast at 53.1 from the Markit flash German PMI. France has failed to beat expectations but it continues to improve on a month to month basis. The flash reading is an incomplete picture but the French and German data are good indicator of the state of the two largest economies.

The different growth paths of Germany and France are telling as Europe is struggling to regain traction. The European Central Bank launched their QE program with the aim to stimulate growth in all markets, but it has always been the case that bigger market are better positioned to reap the benefits of the easing program. The biggest worry hanging over European consumer and business sentiments is the Greek debt situation. Failure to reach a deal could trigger a Grexit if Greece fails to secure funding to repay its debt obligations.

European leaders have left it to the Greek government to do most of the heavy lifting after the talks were met with a combative new government. So far Prime Minister Alexis Tsipras and Finance Minister Yanis Varoufakis are still caught between the political promises and the economic reality of an existing agreement. The main difference from the talks held two years ago from the European lenders is an air of resignation and annoyance that could mean the Greek offensive has backfired horribly.

The EUR/USD built a strong rally last week as the U.S. data was weaker than expected and raised questions about the timing of the first Fed rate hike. This week the EUR has depreciated as New York Federal Reserve President William C. Dudley made comments about a United States interest rate hike by the end of the year. The comments boosted the USD and added to the uncertainty surrounding the Greek drama pushed the EUR/USD below 1.0750.

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza