China’s reopening shifts the narrative amid strong PMIs

Record PMIs for China turns markets risk positive

• China PMIs jump: The February PMIs significantly beat expectations.   
• A risk-positive reaction on currencies: The USD and JPY are underperforming major forex as the commodity currencies rebound.
• Equities looking to rally: After weakness yesterday, European indices are rallying solidly. US futures are also higher.
• Precious metals and oil rebound: A decisive rebound on commodities as gold and silver form key reversal patterns. Oil is also building higher.

Chinese PMIs significantly beat forecasts 

With ongoing concerns over inflation, the hope of the China reopening story has been a key factor behind why markets have not taken a negative risk spiral in recent weeks. 

This hope has cranked up a notch or two today as China’s PMIs for February have significantly beaten forecasts.

The PMIs are some of the most up-to-date gauges of the health of the economy. It looks as though the reopening after zero-COVID is progressing well.

Both the government PMIs and the Caixin (unofficial data) have topped expectations:

• China’s Manufacturing PMI (official) increased to 52.6 in February (from 50.1 in January). This beat the 50.8 forecast and is the highest since May 2012.
• China’s Non-Manufacturing PMI (official services) increased to 56.3 in February (from 54.4 in January). This beat the forecast of 55.0
• China’s General PMI (official) increased to 56.4 in February (from 52.9 in January). This is also a multi-year high, beating the forecast of 53.7.

Furthermore, China’s Caixin Manufacturing PMI came back into expansion as it increased to 51.6 in February (from 49.2 in January).

This boosts risk appetite

The progress of China’s reopening is crucial for risk appetite in the first two quarters of the year. It provides an important antidote to the concerns that traders have for sticky inflation.

So as February has turned into March, markets now have something positive to trade from. Coming on the first day of the new month, this could have positive implications for risk appetite in the days ahead.

A strong recovery in China boosts the prospects for international trade, demand for commodities and broad economic activity. 

We are seeing markets responding with a risk positive bias this morning:

• In forex, the commodity currencies (AUD and NZD) are performing well
• Metals prices are rallying (with both Gold and Silver forming bullish technical reversal signals)
• Equity markets are rebounding after yesterday’s losses.
• USD rally is stalling

The USD is seen as a safe haven currency that underperforms as risk appetite recovers. This is what we are seeing today.

The Dollar Index rally of February has stalled at 105.35 in recent days. This is just under the key lower high from January at 105.63.

The February rally breached resistance at 103.40/104.65. The question on major forex will now be whether this old resistance band becomes new support in the coming days.

EUR/USD is ticking higher

We are beginning to see signs of recovery in EUR/USD. 

A bullish outside day session on Monday has been followed by a positive reaction this morning. The corrective trend since early February has been broken by this rebound.

The move is at an important near-term crossroads:

• The falling 21-day moving average is a basis of resistance
• The daily RSI is unwinding back towards 45/50 again, where the near-term rallies faltered in February.

The reaction to resistance overhead between 1.0655/1.0705 will be key in the coming days.

A move through the resistance would suggest the near-term corrective move is over. Above the resistance at 1.0804 would turn the market bullish again.

Support at 1.0565 is a higher low above the important low from Monday at 1.0532.

Gold has turned a near-term corner 

Yesterday’s bullish engulfing candle (bullish key one-day reversal) is a signal for near-term recovery on gold.

This has been backed early this morning with additional recovery which has now broken the downtrend channel of the past month.

This is a near-term rally and for now, is just unwinding some of the corrective momentum.

The immediate test of this rebound will be the lower high at $1847. 

For this to be a sustainable move:

• The band of resistance between $1860/$1890 will need to be breached.
• The daily RSI need to move consistently above 50

Initial support is between $1820/$1825 with yesterday’s low at $1805 now key support.

Support and resistance levels for Forex, Commodities, and Futures/Indices

Data: MT5/IX One

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

All trading carries risk.