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China PMI: Further loss of growth momentum – MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 1, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Lee Hardman, Currency Analyst at MUFG, notes that the renminbi and other Asian currencies have strengthened against the US dollar in the Asian trading session despite the release of further evidence that economic slowdown in China has likely continued early this year.

    Key Quotes

    “The Asian dollar index has remained relatively stable so far this year as it has consolidated close to cyclical lows. The release overnight of the latest PMI surveys from China signalled that business confidence has weakened further in both the manufacturing and non-manufacturing sectors in February.

    The official manufacturing PMI survey declined by 0.4 point to 49.0 in February reaching its lowest level since November 2011. Weakness was evident as well in the non-manufacturing PMI survey which declined by 0.8 point to 52.7 in February reaching its lowest level since December 2008. While the timing of the Chinese New Year can add to the volatility of economic data releases around this time of year, the underlying signal still appears to be that China’s economy has continued to lose growth momentum early this year.

    The limited market response overnight likely in part reflects investor optimism that Chinese policymakers are becoming more active to support economic growth through fiscal and monetary easing. Those expectations were supported yesterday by the announcement from the PBoC that it had lowered the reserve requirement ratio by 0.50 percentage point for the first time since October of last year.

    The PBoC had previously been reluctant to lower the reserve requirement as it could reinforce downward pressure on the renminbi and encourage capital outflows. Dampened Fed rate hike expectations have helped to ease market pressure. Nevertheless, we continue to expect the renminbi to weaken further in the year ahead undermined by the ongoing loss of economic growth momentum in China.

    Dampened Fed rate hike expectations were supported by more dovish comments from Fed Vice Chair Dudley overnight which have weighed modestly on the US dollar. He stated that he is “somewhat less confident” on the outlook for inflation as the balance of risks may be “tilting to the downside”. However, his overall outlook has not changed substantially so far having only marked down his growth outlook very modestly. He did warn that if tighter financial conditions persist it could lead to a more significant downside to his growth outlook. He also expressed some concern about the decline in long-term inflation expectations. In contrast, he did not place much emphasis on the recent stronger than expected actual inflation readings which were downplayed for now by stating only that one month of data doesn’t make a trend. The comments clearly signal that the Fed is unlikely raise rates again this month.”
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