To wit, China’s HSBC Flash Manufacturing PMI figure came in at 48.3, painting the same subdued picture that it has for the past few months. China bulls may take solace in the fact that this was the first time the measure has improved since back in October 2013, but traders will want to see if the figure can get back above the key 50 level, indicating expansion rather than just stabilization, before brushing off concerns of a slowing economy.
The People’s Bank of China (PBOC) also appears worried about the lackluster economic performance, and the central bank recently took two steps to try to head off economic weakness.
First, the PBOC continues to set its central parity rate for the USD/CNY at higher levels, leading to more weakness in Chinese yuan. The central parity rate for USD/CNY currently sits at 6.1599, near its lowest level since Sept. 2013, and the PBOC hopes that the ongoing weakness in its currency will increase exports and stimulate economic growth.
Beyond the day-to-day tinkering with the exchange rate, the PBOC also took a token step of selectively cutting its reserve requirement ratios for rural banks yesterday. By requiring these banks to hold less excess cash, the Chinese government hopes that the banks will encouraged to lend more money and provide much-needed funds to China’s rural areas. In our view, this action is largely symbolic as it does nothing to boost growth in China’s largest cities, where most economic activity takes place. A country-wide cut for all Chinese banks would be far more interesting from a macroeconomic perspective, but the PBOC clearly prefers to keep that ammunition in reserve for now.
Technical View: USD/CNH
As a result of the above data and actions, the CNH (off-shore Chinese yuan) has dropped to a new 14-month low against the US Dollar. The USD/CNH rallied up to test the 61.8% Fibonacci retracement of the July 2012 to January 2014 drop at 6.2486, a level that may provide stiff resistance for the pair moving forward. Meanwhile, the ADX indicator shows that the bullish trend in USD/CNH remains very strong, with current readings well above the 20-25 area that delineates trending and rangebound markets.
If the USD/CNH breaks above 6.2486 resistance, the strong trend could continue in the days and weeks to come, especially if the PBOC takes more aggressive actions to ease financial conditions.
Meanwhile, as long as the pair stays above its 20-day MA at 6.2140, the medium-term uptrend remains intact. Only a break back below that indicator would shift the technical bias back to neutral in our view.