Data released overnight caught the market by surprise as the Chinese manufacturing PMI came in stronger than expected in March at 52 versus analyst expectations for a reading of 45. With the outbreak of COVID-19 leading to nationwide shutdowns, the manufacturing sector had fallen to an all time low of 35.7 over the prior month. While analysts were looking for a rebound, a move back into expansionary territory so soon is certainly something of an outlier.
Strong Improvements In Manufacturing
The country’s Bureau of National Statistics, which compiles and releases the data, said that continued control of the viral outbreak in March had fuelled a “significant acceleration” in the resumption of production noting that the sub-components for production, new orders and employment had each expanded over the month. The production component alone improved by 26.3 on the month back up to 54.1. New orders also rallied strongly from 29.3 over the prior month to the current 52 level.
Going into further detail, the Bureau explained that due to the Chinese economy hitting such a low level in February, a recovery over the next month was an easier task and warned that the rebound in manufacturing does not mean that the Chinese economy has returned to normal levels.
It is also worth noting that the average manufacturing PMI for February and March is now 43.9 which is well below the average of around 50 seen ahead of the COVID-19 outbreak. Nevertheless, if the rebound is maintained across April this means that China will have avoided a prolonged slump in activity, which many were forecasting.
China To Recover in H2?
Looking ahead to the rest of the year, many players are now increasing their forecasts for China due to the level of pent up demand which will need to be worked through, creating an accelerant for economic activity into H2. However, the speed of the recovery in China will depend greatly on how the COVID-19 situation is handled over the next month.
Restrictions on movements in Hubei province, the epicentre of the virus, have started to ease now following the stringent measures in place there over recent months. However, health authorities are cautioning against the potential for a re-emergence of the virus, even in areas deemed to be safe, warning that it could be many more months until the virus is under control.
USDCNH (Bullish above 7.0570)
From a technical viewpoint. USDCNH has been holding in a consolidation pattern after breaking out above the bearish trend line from 2019 highs and the 7.0570 resistance level. While price holds above this level, and with VWAP supporting, a continuation higher is likely. The next upside objective will be supply zone around the 7.1966 structural level and the yearly R1 above at 7.2156.
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