HALISTER1: China PMI May Strike Another Blow to Yuan Before Fed: Analysts

China PMI May Strike Another Blow to Yuan Before Fed: Analysts

(Bloomberg) -- If Chinese manufacturing PMI disappoints with reading below 50 this week, investors may be encouraged to sell the yuan regardless of what Fed plans for U.S. rates, analysts say.
  • Low PMI could accelerate outflows as sentiment for Chinese economy deteriorates; yuan already heading for biggest monthly decline since Aug.; down 1.6% vs dollar in May
    • USD/CNY rose 0.25% to 6.5815 Monday, approaching 2016 high of 6.5956; USD/CNH gained 0.22% to 6.5904, highest since Feb. 3; PBOC set yuan fixing at weakest level since 2011
  • Growing expectation for Fed rate hike in coming months heightens concerns for capital flight; Yellen said Friday an increase in U.S. rates would be appropriate, though didn’t detail timing
    • Fed funds futures put chances at 30.0% for June, 53.8% for July
  • Median est. in Bloomberg survey is for China May PMI at 50.0 vs 50.1 in April; PMI also expanded in March, but contracted every month from Aug. through Feb.
    • Ests. range from 49.7 to 50.2
    • 32% forecast number below 50
  • Natixis (Iris Pang, senior Greater China economist)
    • Minor drop in factory PMI may bring more volatility to yuan, adding to concerns on Chinese debt and possible Fed rate hike
  • Huabao Trust (Nie Wen, economist)
    • Some indicators such as electricity usage have been falling in May, suggesting slowdown in factory activity
    • If May PMI data below 50, could accelerate capital flight as outlook deteriorates
  • Of all key Chinese monthly economic data, manufacturing PMI has higher correlation with yuan than any other since 2014
    • Manufacturing PMI & USD/CNY at -0.689
    • Exports y/y in USD term & USD/CNY at -0.335
    • M2 growth & USD/CNY at 0.320
    • Industrial production & USD/CNY at -0.445
    • CPI y/y & USD/CNY at 0.103; with PPI at -0.613
  • OCBC Bank (Tommy Xie, economist)
    • PMI has replaced industrial output as main reflection of corporate sentiment on economic outlook
    • If companies turn more pessimistic, won’t be willing to convert dollar holdings into yuan; will look to increase FX holdings
    • Yuan’s longer-term direction more decided by fundamentals, such as health of China’s economy, than fluctuation of dollar
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Iris Pang (Natixis SA)
Nie Wen (Huabao Trust Co Ltd)
Tommy Xie (Oversea-Chinese Banking Corp Ltd)

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