China recovery stays on track

Being the first Monday of the month, today is Purchasing Manager Index (PMI) Day. China’s Caixin Manufacturing PMI has confirmed that its steady recovery remains on track, rising to 52.8, well above the 51.3 expected. Fellow heavyweights Japan and South Korea also posted improving numbers, although both are still in modestly contracting territory.

The picture was less clear across regional Asia, though. Taiwan climbed back above 50, with Thailand also improving; however, both the Philippines and Vietnam and Malaysia went backwards. The recovery continues to be uneven across the region, although markets can take heart that the major players are making steady improvements.

Germany, France, Italy and the United Kingdom and the United States all release their manufacturing PMI’s today. Again, the story should be that of consistent improvement, notably in Europe and the United Kingdom. The United States data is an increasing risk point due to its inability to mitigate the spread of Covid-19. Combined with no progress on a follow-on stimulus package from Washington DC, the odds of a double-dip in economic activity is increasing.

On the subject of Covid-19, Australia’s Victoria State announced a return to draconian restrictions for Melbourne yesterday, with slightly milder ones for the rest of the state. That has weighed on both Australian stock markets and the currency this morning. Okinawa in Japan also declared an emergency over the weekend, with nagging doubts remaining that Tokyo may be forced to follow suit. Covid-19 either remains rampant or is making worrying localised comebacks across the world. Although not priced into financial markets yet, it remains the critical risk factor to global recovery. Particularly, if key economies that had previously controlled Covid-19 are forced back into large scale lockdowns again.

From a central bank perspective, we have the Reserve Banks of Australia and India, as well as the Bank of Thailand and Bank of England rate announcements this week. Of the four, only India is likely to ease further, with the other three unchanged but affirming dovish guidance.

The week’s data highlight will be this Friday’s US non-Farm Payrolls. After a blowout jump of 4.8 million jobs last month, this month’s data is expected to show a still impressive rise of 2.2 million jobs for July. The market risk is that number severely underperforms due to a renewed Covid-19 slowdown. Fears of a double-dip would likely boost the US dollar but see momentum wane in stock markets, albeit probably temporarily.

Geopolitical noise from the US increased a notch over the weekend. President Trump is threatening to ban Tik Tok and an unspecified number of Chinese apps. It does highlight the challenge that Chinese companies will have to emerge from their domestic market, when, by law, China’s government can order an entity to hand over all its data, theoretically. Byte Dance being the latest aspirational Chinese company to run afoul of the Americans and others on this significant point. Given that the great firewall of China blocks anyone who is anyone from doing business on the mainland, which is another asymmetric point of tension; the fallout from China’s government should be relatively modest. Even China will struggle to spin their way out of that one with such a blatantly uneven playing field.

The great rotation out of US dollars appears to be pausing for breath this week, led by a massive jump in USD/JPY. It rose from 104.70 to 105.80 on Friday, on no discernible news. It has now traced out an impressive outside reversal day that signals more gains to come for the greenback. That seems to have been the cue for profit-taking to set in on other currency pairs. This week may feature more sideways price action than previous ones, although only Covid-19 can undermine the underlying bearish case against the US dollar.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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