A slowing Chinese economy has been marked as one of traders’ biggest fears for the past few years now, and the economic data thus far this year has only exacerbated those concerns. Last month brought weaker-than-expected reports on inflation, New Loans, Fixed Asset Investment, and Industrial Production, though the widely-watched HSBC Flash Manufacturing report ticked up slightly to 49.7. As a reminder, this survey has been mired below the 50 level since the beginning of this year, suggesting that activity in China’s critical manufacturing sector has been consistently contracting.
This weekend brought another small ray of sunshine to China bulls, with the official government manufacturing PMI survey printing at 50.8, slightly higher than the market’s anticipated reading of 50.7. The details to the report were also constructive, with leading subcomponents like input prices, output, and new orders, which rose to a 6-month high. From here, traders will closely monitor whether tonight’s HSBC Manufacturing PMI report is able to claw back above the 50 level and confirm the strength in the government’s official data.
These nascent signs of economic improvement have been driven by piecemeal measures by the government and People's Bank of China to stimulate select areas of the Chinese economy. Last week, China’s State Council approved a plan to decrease reserve requirements for banks that extend loans to rural areas and small businesses. Despite the recent improvement in economic data, the world’s second-largest economy will have difficulty reaching its 7.5% growth target this year, and many market participants anticipate that the PBoC will be forced to cut interest rates or reserve requirement ratios at some point in Q3.
Technical View: USD/CNH
The chart of the U.S. dollar against the Hong Kong-traded offshore Chinese yuan shows that the pair remains near its 8-month high at 6.2710. Focusing purely on price, the uptrend in USD/CNH remains strong, with the pair putting in consistently higher highs and higher lows since the beginning of this year. The secondary indicators, on the other hand, reveal some cracks beneath the surface.
For instance, the relative strength index has now carved out a quadruple bearish divergence with price, indicating decreasing buying pressure on each recent high. The Moving Average Convergence-Divergence has also been trending lower four over two months and is nearing the key “0” level that would show a shift to outright bearish momentum.
Moving forward, USD/CNH bulls would like to see a confirmed break to new 8-month highs above 6.2710 to reconfirm the uptrend and potentially expose the 6.30 level in the weeks to come. However, if economic data, starting with tonight’s HSBC Manufacturing PMI report, continues to improve, the USD/CNH could pull back to test near-term support at its 50-day MA (6.2290) or the 23.6% (6.2105) or 38.2% (6.1730) Fibonacci retracements of this year’s rally.