Australian Dollar vulnerable to weak Chinese PMIs

Last week, Moody’s Rating Service unexpectedly slashed the credit rating of China as it is growing uncomfortable about their cash reserves and slow down. This will be a test of how close the Australian dollar (AUD/USD) is tied to the economic growth of the world’s second largest economy.

Moody’s has stated that their worries are not pressing. They are justifiably concerned that over time Chinese growth may slow and that they have a rising debt profile. This will present Beijing with difficulties.

Investors are starting to accept that China is expecting their gross domestic product growth (GDP) to slow this year. The first quarter saw their GDP 6.5% target for this year and it is lower than 2016’s actual 2.7% rate. Indeed, that was a 26-year low.

This week, China will be releasing a couple key pieces of economic data in the country’s official purchasing manager’s indices (PMI) for services and manufacturing in May.

The official PMI is due on Wednesday. This focuses on large firms which often have heavy state involvement. This print is expected to slip a bit to 51.0. This will be below April’s 51.2.

The private, Caixin PMI will be released on Thursday. This is expected to remain in expansion territory. Economists are expecting a print of 50.2 print. This means that it is flirting with a seven month lows.

Australian Dollar Traders to watch the Data

Australian Dollar traders will be watching for unexpected outcomes. However, really bad misses could already be priced in. Still, Forex traders need to be cautious of a big miss. Should there be any sign of a more rapid deceleration may cause officials in Beijing to switch focus from deleveraging and regulation back to economic growth.

There is also that problem with the ever rising level of public debt in China. To Moody’s that is a bigger problem.