Aussie Falls On Contractionary Chinese HSBC Flash Manufacturing PMI

The Takeaway: Chinese HSBC Flash Manufacturing PMI fell into contraction to 49.5-> Slowing Chinese growth signals risk for Australian exports and possible further rate cuts-> AUD/USD declined

The Australian Dollar declined against all of its counterparts on the disappointing Chinese HSBC Flash manufacturing PMI. The preliminary measurement of manufacturing activity fell to 49.6 in May compared with a final reading of 50.4 in April.The figure came in well shy of estimate set for 50.4.

The worse-than-expected preliminary PMI suggests the manufacturing sector in China is in contraction, which is in line with the lower-than-expected gross domestic productivity for the first quarter. As China is a key source of demand for Australian pivotal mining sector, it carries significant negative implication on the RBA growth forecast as well as its rate decision at their future meetings. Given the RBA has cut its benchmark interest rate to 2.75 percent this month, further rate cuts would certainly diminish the demand for the high-yielding Australian dollar. Currently, market is pricing in a 15 percent probability that the RBA will cut interest rate in their next meeting on June 4, according to Credit Suisse overnight index swap.

Besides its direct implications for the Aussie, the Australian dollar was earlier restrained as Fed’s Ben Bernanke signaled the possibility of a reduction in bond purchases in the next few meetings. Consequently, risk appetite receded and high-yielding currencies such as the Australian dollar and New Zealand dollar declined against most counterparts. Upon the release, the AUD/USD shed as many as 33 pips and as the time of writing, the currency pair is trading at 0.96394.

AUD/USD 1-Minute Chart

Chart Created by Robin Leung using Marketscope 2.0

Aussie Falls On Contractionary Chinese HSBC Flash Manufacturing PMI