FX comment – Weak China manufacturing PMI gauge triggers risk off mode in currency markets

by: Roy Teo

 

  • Weak China manufacturing PMI gauge triggers risk off mode in currency markets
  • Commodity currencies weaker

 

Weak China manufacturing PMI gauge triggers risk off mode in currency markets

A gauge of China’s manufacturing sector fell further into contraction territory in September, reigniting market worries that the slowdown in China may be more pronounced. The Caixin manufacturing PMI declined from 47.3 to 47.0 in September, against market consensus of a recovery to 47.5. It was the lowest level since March 2009. At the time of writing, the offshore Chinese yuan (CNH) was sold off by more than 150 pips to around 6.4320, before┬árecovering to 6.4230. The CNH forwards market also reacted by pricing in a larger magnitude of depreciation by the end of this year. In our view, we think that financial markets are still under-estimating the magnitude of the likely depreciation. Even though we expect a soft landing in the economy, we think additional monetary stimulus will prove necessary to achieve this. We therefore expect the CNH to decline to around 6.55 against the US dollar by the end of this year, compared to three months CNH forward rate of 6.50.

 

Commodity currencies weaker

Both the Australian (AUD) and New Zealand dollars (NZD) were sold off after this morning’s disappointing China data. The AUD and NZD were lower by about 50 pips to 0.7030 and 0.6260 this morning. We see material downside risks to our AUD/USD and NZD/USD 2015 year end forecasts of 0.70 and 0.63, respectively.