Gradual Recovery Underway in China
Recent data sets from China continue to point to a recovery, however, the improvements have only been gradual and suggest that the return to pre-virus levels of economic activity is going to take longer than first thought. Given that China was the first to move out of lock-down measures ( as it was the first to apply them) this creates a worrying template for the rest of the world as central banks one-by-one give up hopes of the initially anticipated “V” shaped recovery.
Industrial Production Rebounds
Industrial production recovered 3.9% in April, following a -1.1% fall in March. While this is an encouraging figure, it was only partly due to a rebound in factory activity as a result of the 5G infrastructure under production. However, this next month will be key in determining the true recovery of the sector as the absence of export demand form the rest of the world becomes more pronounced. Global demand is likely to continue to weaken in the near term in line with the downturn being seen in the economies of China’s key trading partners.
Retail Sales Still Negative
Following on from a -15.8% reading in March, Retail sales rebounded in April but at -7.5% on the year were still heavily impacted by the lock-down measures. Within that reading, telecommunications and cosmetics grew 12.1% and 3.5% respectively while catering was seen down by 27.9%. With an elevated domestic unemployment rate, consumption is likely to remain subdued in the coming months. Additionally, with lock-down measures having been reintroduced in some places in China this month, any rebound is likely to be subdued also.
It is also worth considering that the domestic recovery in China is not the full picture and that the health of the global economy is also vital here. With almost 20% of China’s annual GDP coming from exports, the recovery in the US, UK Europe and Asia will also be under close consideration.
US/China Tensions Pose Risks
Other external factors such as the health of US/China relations need to also be considered. Over recent weeks tensions have escalated with the US reportedly considering targeting China with financial penalties over its accusations of China’s role in the spread of COVID-19. There is now a rising fear over the potential for US/China trade talks to collapse again. The two-year trade war took a heavy toll on the Chinese economy and, in the wake of the COVID-19 crisis, a return to such conditions could be fatal for the Chinese economy.
USDCNH (Bullish above 7.0862)
From a technical viewpoint. USDCNH remain supported at the 7.0862 monthly pivot and continues to put pressure on the 7.1541 level. With VWAP supporting, a break higher here looks likely with the 7.1966 level the next topside marker to watch. To the downside, if we see any reversal below the monthly pivot, the 7.0570 region is the next key support to watch.
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