Positive Data But Risks Remain

The latest economic data out of China showed that the factory sector in the world’s second largest economy expanded again in June. Printing 50.9 on the month, the rise in manufacturing activity was above the expected 50.4 reading the market was looking for and marks an uptick from the prior month’s 50.6 reading.

Following a plunge to record lows of 35.7 in February as the COVID-19 crisis took hold there, Chinese manufacturing data has now grown over each of the last four months, offering encouraging signs that the Chinese economy continues to recover.

Chinese Manufacturing Rises While Second Wave Fears Develop

The breakdown of the data, released by the National Bureau of Statistics in China, showed that output was seen growing at its fastest pace in three months at 53.9 vs 53.2 in the prior month. Meanwhile, both new orders and buying levels were also seen increasing over the month, rising 51.4 vs 50.9 prior and 51.8 vs 50.8 prior, respectively.

However, there we some signs of weakness within the report with export sales still in contractionary territory at 42.6, despite rising from 35.3 prior, and employment dropping back to 49.1 from 49.4 prior.

New lockdowns In Action

Despite yet a further positive reading, the factory sector remains in precarious territory, only just sitting within expansionary territory. Furthermore, reports of a fresh outbreaks of the virus within China, leading to new lockdown measures being placed on Wuhan and Beijing, mean that manufacturing activity over this month could be more subdued. Looking ahead, the risks of a more developed second wave of the virus mean that the downside risks to Chinese data are still highly prevalent and as such, news of positive data last month has done little to fuel upside in equities sentiment, especially against a broader backdrop of rising fears for a global second wave given the fresh outbreaks in the US and other countries seen over recent weeks.

This week, China announced a fresh lockdown in the county of Anxin in Hebei province, meaning that 400,000 people will be “fully enclosed and controlled” amidst a fresh outbreak there. This comes just under two weeks after Beijing saw fresh lockdown measures there following an outbreak linked to a seafood market. China has increasingly been using flexible, localised lockdowns to treat regional breakouts since relaxing the nationwide lockdowns measures earlier this year and has been effective in controlling subsequent outbreaks. However, there are fears that if a vaccine is not developed by the end of summer, the change in seasons could provide the catalyst for a significant increase in infections rates which could lead to broader lockdowns being reintroduced, placing great pressure on the economy once again. With this in mind, traders continue to monitory the Chinese economic recovery tentatively.

Technical Views

USDCNH (Bullish above 7.0570)

From a technical viewpoint. Following the failure and reversal above the 7.1541 level, USDCNH is sitting in a tight range, underpinned by the 7.0570 level support. VWAP is sitting in the region too, acting as support for now, keeping the near term bias bullish. However, a break here will see a test of the rising trend line from 2020 lows which, if broken could fuel a deeper reversal towards the yearly R1 above 6.94000.

Chinese Manufacturing Rises While Second Wave Fears Develop

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