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Will Weaker Chinese Data Force RBA To Keep Rates Steady?

Last updated 3/1/2010 2:27 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Weaker than expected Chinese PMI Data reversed a small short covering rally in risk FX as European markets opened for trade at the start of the week. Chinese CFLP Manufacturing PMI slowed to 52.0 from 55.8 the month prior which the HSBC gauge dipped to 55.8 from 57.4 in January. Both measures remained firmly in expansionary territory but declined for the second consecutive month after hitting their peak in December of 2009.

Several analysts cautioned that the seasonal factors due to the Chinese New Year may have exacerbated the decline, but the fact remains that Chinese manufacturing production has slowed materially since the start of the year casting doubt on the strength of the global economic recovery story.  The news caused a U turn in all the risk currencies with pound falling from a session high of 1.5200 to 1.5100, euro retreating below the 1.3600 handle once again and Aussie losing the .9000 figure in late session Asian trade.

The disappointing Chinese data may have its greatest impact on the Aussie as traders warily eye tonight’s RBA cash rate decision. The markets anticipate a hike of 25bp to 4.00% given the torrid pace of growth in Australian labor markets. However, recently the RBA has been extraordinarily cautious in its monetary policy stance guided more by the lackluster global macro economic conditions rather than the impressive performance of the Australian economy. 

With Australian economy so highly dependent on Chinese demand, the policymakers in Canberra could once again surprise the markets and hold off on any additional rate hikes until they see stronger evidence of increase in global demand. Even if the  RBA raises the cash rate to 4.00% it may temper market  expectations by hinting at a moratorium on any further rate hike for the foreseeable future. We continue to believe that Aussie represents the strongest bet on the risk trade and will respond best to any upside surprises in economic data, but with the recovery thesis beginning to look more and more questionable as Chinese growth slows and US labor markets deteriorating once again, the danger of further declines in the Aussie  has increased substantially.

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Comments (3)

FXDragon

March 01, 2010 at 07:06 AM ET

I agree with you Chief. I'll sell the kangaroo.

Regards,

hsbc

March 02, 2010 at 09:17 AM ET

well done mate

wannabe360

March 01, 2010 at 08:45 AM ET

Rate hike coming, first home owners to the wall!

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.