As a consequence of the: trade wars, tariffs and sanctions with the USA, China’s manufacturing base has suffered a blow, resulting in the sentiment amongst the purchase managers in Chinese manufacturing falling. The PMI missed the Reuters forecast of 49.7, by coming in at 48.3, close to a three year low. Any PMI reading below 50 is considering contraction and possibly indicative of a sector in recession. The repercussions of China’s manufacturing industry entering into a downward spiral, hasn’t been factored into the currency markets, or global equity markets yet.
As the engine of manufacturing growth worldwide, the global economy would suffer a significant shock, should China’s export driven economy find reverse gear, for any sustained period. Most notably Australia, whose economy is heavily reliant on China, due to the raw materials it exports to (what was) the globe’s fastest growing economy, would suffer a severe hit. The Aussie dollar slipped across the board versus its currency peers, as the Chinese Caixan data was published and by 8:30am U.K. time, AUD/USD traded down 0.32% at 0.724, down -8.51% yearly.
The U.S. dollar rallied versus the Chinese yuan, in overnight and early morning trading, by 8:30am USD/CNY traded up 0.56% after breaching R3, now trading at 6.740, up 6.8% yearly. The subject of the yuan’s value versus the U.S. dollar, is likely to be a major discussion point between the Chinese and USA government delegations, who are continuing their two day meeting on Friday, convened to discuss the current disagreement.
USD has fallen significantly versus the yuan since October 2018 and a weak dollar makes exports cheaper for USA manufacturing, but imports more expensive, causing a counter productive blow to the balance of trade deficit the USA runs with China, a deficit that the Trump administration was determined to reduce. The deficit grew significantly during 2018; America’s deficit with China soared to $106 billion for Q3 2018, up from $93 billion during the same period in 2017. For the year up to to September, America’s trade deficit with China ballooned to $305 billion, rising from $276.6 billion in 2017.
The cordial detente between the two economic powerhouses which ends on Friday, is also set to discuss how China can buy more goods from the USA, in order to address this huge balance of trade deficit. Normally the USA would confront such an issue, with the polite request to purchase weapons worth tens of billions of dollars, or USA made autos and machinery. However, China has no demand for such goods from American manufacturers and the only concession offered so far, appears to be an increased purchase of American farmers’ soya beans, which won’t make a dent in the huge USA deficit.
Focus will remain on the USA economy during Friday afternoon’s trading session as the latest: unemployment, earnings and the NFP figures are published. The unemployment and unemployment statistics are expected to remain unchanged. According to the Reuters forecast; unemployment is forecast to remain at 3.9%, with earnings remaining up 3.2% year on year, with a slight fall in December to 0.3%. The NFP number is forecast to come in at 165K for January, a fall from the 301K jobs created in December.
The first NFP jobs count of the year can often be volatile, as seasonal jobs disappear. This latest NFP number is also likely to be impacted by the U.S. government shutdown, which only ended last week. Therefore, such a low number, if the forecast is met, may not cause the volatility witnessed during other times of the year. Traders would still be advised to diarise this high impact calendar release, due for publication at 1:30pm, when the other unemployment/employment data is also published.
The overall jobs data compliments the latest ISM manufacturing reading for the USA, published at 3:00pm U.K. time. The ISM readings for USA based analysts and firms, are regarded as more relevant than other surveys, such as the PMIs published by IHS Markit. The forecast is for the January ISM reading to remain unchanged, vis a vis the December metric at 54.9. The university of Michigan sentiment index will also be published during the afternoon session, the reading for January is expected to replicate December’s reading of 90.7.
Sterling sold off versus the majority of its peers, during the early part of the London trading session. GBP/USD initially oscillated in a narrow range, between the daily pivot point and the first level of support S1. At 9:00am cable traded at 1.308, close to the 1.300 handle, down 0.10% on the day. However, the major currency pair then fell sharply, as the latest U.K. manufacturing PMI was released at 9:30am; coming in at 52.8, missing the forecast and falling from 54.2, putting the subject of Brexit and its overall impact on U.K. commerce, back on the radar. By 10:00am GPB/USD slumped through S2 and was trading down 0.40%.
The subject of Brexit was made more crucial for the U.K. economy and MPs looking to find the key to unlock the Brexit deadlock, after a survey conducted by the Institute of Directors, concluded that 1 in 3 of U.K. businesses is considering exiting the U.K., if a no deal Brexit occurs.
EUR/USD also traded in a tight range during Friday morning’s trading session, Germany’s manufacturing PMI missed the forecast, coming in at 49.7, indicating contraction. At 10:00am U.K. time, EUR/USD was up 0.20%. The latest CPI inflation metric for the Eurozone came in on forecast at 1.4%, falling from 1.6% previously.
