Weak PMI Print Could End The Yuan's Bull Run
China's HSBC flash purchasing managers' index slipped below 50 this month, coming in at 49.6 and missing expectations of 50.3. This is the first dip into contractionary territory since July 2013, and suggests that hopes of a robust start to 2013 are likely to be dashed. The details of the breakdown reveal quite a deflationary picture. As well as new orders reversing their expansion, new export orders posted a faster decline, while inventories built up and input and output prices both declined.
In addition to painting a downbeat picture for subsequent economic activity, the PMI print suggests that the currency is likely to come under pressure. Thus far, region wide currency weakness has failed to impact the yuan, which has managed to continue appreciating. However, we believe that this outperformance may be nearing an end. Technically, the 12-month non-deliverable forward outright is posting bearish RSI divergence and could be gearing up for a move weaker. We believe that the People's Bank of China will become more amenable to this scenario as the twin threats of a renewed slowdown and deflation rise.
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|China - HSBC Flash Purchasing Managers' Index|