HSBC and Markit released the “flash” (estimate) of the June Chinese PMI today which showed a big jump to 50.8 from last month’s 49.4 print.
That’s a seven-month high.
This helped the Aussie dollar, which had been trading as low as 0.9374 in early trade, rocket more than half a cent to currently sit at 0.9437. Now it is very close to breaking a 7-month high, and into a new, higher range as European traders get to their desks for the start of their week.
Hongbin Qu, chief economist China from HSBC said today that the spike in PMI is a sign that “authorities’ mini-stimulus are filtering through to the real economy”.
Indeed, this is exactly what the second chart of the Citibank Economic surprise index shows: a huge turn around in the data prints relative to expectations.
The key here is that the recovery in the flash manufacturing PMI in China (top chart) has mirrored, or accompanied, by a general recovery in the level of all Chinese economic data as Chinese Economic Surprise index (bottom chart) shows.
The economic surprise index measures the level of over, or under shoot of economic data releases, relative to the market’s expectations. By its very nature it is a measure of economic confidence and has a tendency to be mean reverting – that is the market, pundits and economic forecasters tend to move from over-confidence in the economy, to under-confidence and back around a central zero line through time.
Given low volatility recently it is fairly certain that traders are going to use this data as an excuse to get something happening and try to push the Aussie higher.
Ray Attrill, NAB’s co-fead of FX strategy told Business Insider that he thought there was a “pain trade” if the Aussie dollar heads above 0.9460 and that “if vols (sic) stay where they are or move back to the lows, I think we can trade up to 95 at least in next week or two”.
The key though, and something that for now the RBA will be uncomfortable about, is that the Aussie seems to be a glass half-full trade with Attrill adding “Having ignored the poor China news / tumbling iron ore price earlier in the year, FX market now seems to be viewing the stabilisation/upturn in Chinese data favourably.”