China will publish the official government manufacturing PMI gauge on Thursday at 01:00 GMT, with the private Caixin/Markit manufacturing PMI following on Friday at 01:45 GMT. The official PMI contracted in December for the first time since July 2016, confirming a deepening slowdown in the world’s second largest economy. A second straight month of contraction would likely add to investor jitters about the growth outlook for 2019 and could increase pressure on Chinese authorities to find a quick resolution to the long-running trade spat with the United States.
The National Bureau of Statistics’ manufacturing PMI, which consists mostly of large and state-run enterprises, fell to 49.4 in December and is forecast to have fallen to 49.3 in January to a near three-year low. The Caixin/Markit manufacturing PMI, which focuses more on small and mid-sized enterprises, also fell below the 50 level – which separates expansion from contraction – in December. It is expected to fall to 49.5 in January.
Trade figures for December released earlier this month showed the country’s exports tumbled by 4.4% year-on-year as the frontloading effect from higher US tariffs started to wane. This could be an indication of worse to come for Chinese manufacturers in 2019 and another disappointing figure for January would add to worries about China’s weakening growth picture.
Chinese businesses are not just battling increased protectionism from the US but also tougher lending controls at home as the government presses on with its deleveraging reforms. However, in recent months, authorities have stepped up measures to counter the liquidity squeeze by slashing banks’ reserve requirement ratio, announcing various policy tools to boost lending to smaller firms and injecting huge amounts of money into the financial system via open market operations. The government is also planning on raising fiscal spending significantly in 2019 to lift growth.
The combined fiscal and monetary stimulus could be enough to stave off a severe downturn. However, their effects are unlikely to be felt until the middle of the year and until then, investors will be nervously watching the incoming data for clues about the health of the economy.
As for this week’s releases, the Australian dollar is at risk of falling back below the $0.71 handle if the numbers disappoint. The aussie is sensitive to Chinese economic indicators and is viewed as a liquid proxy for the yuan given that China is Australia’s biggest export destination.
Worse-than-expected readings in the manufacturing PMIs could send the aussie seeking nearby support around $0.7120 – the 23.6% Fibonacci retracement of the upleg from $0.6743 to $0.7235. This is also where the 200-period moving average is converging. A break below this support region could accelerate the declines towards $0.7047, which is the 38.2% Fibonacci level. Further down, the 50% Fibonacci could be a key support at $0.6989 before the bears aim for the 61.8% Fibonacci at $0.6931.
On the other hand, if the data surprise to the upside, the aussie could target the January top of $0.7235. A successful break above this level could drive the currency first towards the $0.7275 resistance level and then the November 2018 peaks around $0.7335.
