PMI Shows Chinese Manufacturing in Contraction

Daily Analysis - 01/03/2016

PMI Shows Contraction in Chinese Manufacturing

Manufacturing PMI data from China released earlier today showed a decline to 49, marking a 5-year low last seen in December 2011. The Caixin data was also weaker, slipping to 48.0 from 48.4 previously. The markets are currently cautious, driving risk aversion following the weak numbers from the world’s second largest economy.

Flash EU Inflation Deflating - Euro Slips

Yearly CPI estimates from the Eurozone released yesterday showed a deceleration to -0.20% in February, compared to a 0.30% increase in January. On a monthly basis, inflation rose a meager 0.10% with four major economies in the Eurozone recording negative inflation rates. Core Eurozone CPI was 0.70%, lower than estimates and sparking concerns in the ECB. However, the recent rally in oil prices could help in stabilizing short term inflation rates if they are maintained. The ECB is likely to announce further easing in March with markets pricing in a -0.10% rate cut while monthly bond purchases are expected to increase by €10 billion. The currency continued to slide against the Dollar yesterday and maintains its bearish movement, drifting lower towards the 1.0500 handle.

Further Easing in China Through Cut in Reserve Ratio

In a surprise move, the Peoples Bank of China lowered the Reserve Requirements Ratio by 50 points, expected to release ¥689 billion in lending liquidity. The move is also likely to depreciate both the onshore and the offshore Yuan. The move by the PBoC comes just after China made a statement at the G20 summit over the weekend that it would prevent further devaluation. Ahead of the announcement, the Yuan's rate was fixed to a three week low at 6.5490 as the markets remain cautious of further policy interventions from Chinese authorities. Following the cut, the Yuan weakened briefly but soon erased the losses to continue to trade stronger across the board.

RBA Policy Holds Steady

The Reserve Bank of Australia left interest rates unchanged at 2.00% at its monetary policy meeting today. In the statement, the bank noted it would keep monetary policy accomodative and that low interest rates would help spur demand. The announcement also kept the door open for more policy changes after a thorough assessment of the Australian labour market and continued monitoring of inflation. Last month's unemployment data saw the rate spike to 6.00% following a few months of decline to 5.80%, increasing the uncertainty in the jobs markets. Australia's quarterly inflation was at 0.40% and 0.60% on average. AUDUSD is currently trading lower at 0.7129 following the bank’s statement.

Decreased Growth Expected for Canadian GDP

Today’s monthly GDP data from Canada is expected to show an increase of 0.10% for the month of December. This follows a 0.30% increase November of 2015. On a quarterly basis, Canadian GDP is forecast to rise a meager 0.10% annually, down from 2.30% growth seen a month before. Monthly and quarterly stats will likely result in flat yearly growth. A weaker pace of GDP growth could potentially mean that the Canadian economy has failed to grow in nearly three quarters, which could spell recession. This slow pace could also push Canadian authorities to add more stimulus, which is going to be difficult as the projected budget deficit has already expanded to $18.4 billion for the next fiscal year. USDCAD closed mixed yesterday following a few days of declines, indicating a possibility of an upside breakout if GDP disappoints.