Watching USD/CNH as Chinese slowdown accelerates

Today’s PMI data shows a contraction in both manufacturing and services, numbers that economists are attributing to the ruling Communist Party’s hard-line on the spread of Covid-19.

(Video Transcript)

There is more evidence today of a slowdown in the Chinese economy, driven mainly by the Communist Party's attempts to try and stamp out Covid-19.

And this zero-Covid policy continues and it's showing up in some of the data.

NBS manufacturing PMI

Let's take a look at what we've seen today, because we've seen Chinese NBS manufacturing PMI falling to 49.2 in October from 50.1 in September, missing forecasts of a reading of 50.

Now, this is the lowest readings since Covid restrictions affected output and exports, and anything below 50 indicates a contraction. So this will contribute negatively to the slowing down of the economy.

Non-manufacturing PMI also fell to 48.7 from 50.6 in the previous month - the first contraction in the services sector since May.

USD/CNH

There's two ways to trade this.

First of all is this chart here, which is showing the US dollar rising once again against the offshore Chinese yuan, third in a row of gains.

And in fact if we close at these levels, it will be a record high for the dollar against the Chinese offshore yuan at 73205. We have seen it higher than this intraday we saw back on Tuesday last week. But this push higher is significant again and it's not just strength of the US dollar, it is now highlighting this weakness within the Chinese economy.

Base metals

And it's not the only way to trade this. The other way to trade it is to look at some of the base metals where there had been a rise because of the Chinese enthusiasm for building and for infrastructure projects and making sure people are active within the economy.

But since Covid there has been this pullback and in fact today we've now got a new lower low print that we've seen, and this is the lowest level we've now seen since the 3rd of December.

So we're very close to 11-month lows for not just iron ore but other base metals also feeling the pinch. So this Chinese data is exacerbating the downside for many parts of the economy.