China on the path of strong recovery

FXP_2020

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March marks an important month for the world’s second largest economy – China. The annual Two Sessions – the most important political meetings of the year are taking place in Beijing, where a number of policy decisions are expected to be revealed to the public. This year is particularly important as the 14th 5-year plan is commencing in 2021, at the back of slowing PMI data. The world’s second largest economy – the U.S., is also reporting PMI data later this week and the economists are expecting services PMI-s to remain the same, or expand slightly.

China, world’s second largest economy with a GDP of U$14 trillion, or approximately 17% of global GDP, is not showing signs of slowing down in 2021. China’s economy, only among large, developed countries, expanded 2.3% in 2020. Economists expect 2021 growth to be north of 8%. 2021 marks an important year for the China Communist Party with the central party celebrating the 100th anniversary of founding which makes this year’s Two Sessions important. The meetings of CPPCC and NPC are the biggest political events of the year with 5000 delegates across the country gathering in Beijing. 2021 also marks the start of a new 5-year plan that is expected to define Xi’s legacy. The focus for the next 5 years is on high quality growth, autonomy in a number of key sectors (including technology and agriculture), while focusing on green production, reforms and modernization. Xi has also mentioned that China should become a high-income country by 2025 with that of GDP per capita of U$ 12,535, from current U$10,000. The 15-year plan, the second of such published, targets becoming a modern socialist society with a GDP per capita of U$ 30,000, tripling from current levels by 2035. Analysts have expressed views that given the focus on high quality growth and reforms, China may see slowing GDP growth, potentially averaging around 5% for the next 5 years. PMI-s published today showed manufacturing PMI has slowed from 51.3 to nine-month low of 50.6. Non-manufacturing PMI has slowed from 52.4 to 51.4, also a nine-month low. Caixin manufacturing PMI has been slowing since November, falling to seven-month low of 51.5 in January. Service composite has shown the same trade, touching nine-month low of 52.0 in January, with latest Caixin data being published later this week. USDCNY has weakened 6.3% in 2020, trading currently near 6.42, level last seen in June 2018. The pair has been trading in a tight range of 6.42 – 6.49 since January, potentially indicating PBOC’s intervention. Price has been testing 50-day moving average resistance on 3 occasions since early February. The weekly chart reveals a strong bearish momentum with support levels near 6.4249, while resistance could be found near 6.4754.

U.S. non-farm payrolls data is published this week, with the consensus expecting 148,000 new jobs to be added, vs last month’s 49,000. Economists expect U.S. jobs market to recover in 2021 with 5.3 to 6.7 million jobs to be added. The gains would not completely wipe off 2020 job losses that reached 9.4 million. While unemployment rate has dropped to 6.1%, labor force participation rate has also dipped to 61.4% and female participation to 33-year low of 57%. The Fed’s Chair Powell mentioned during his testimony to the U.S. Congress that participation rate will be monitored to gauge the health of the private sector job market. Successful vaccine rollout in the U.S. with around 20% of adults vaccinated, is paving way for schools and businesses to re-open, which in turn supports labor, and in particular women, returning to the workforce. Oxford Economics expects boom in consumer-services sector later this year, including hospitality and retail. Contribution to GDP from cyclical services sector will be minuscule, however, as cyclical services contribute only around 4-6% to the economy as a whole. Improved labor market should give a boost to consumer spending, although we should not discount the impact of the pandemic on higher savings rate seen globally.

Equity markets retreated last week with S&P 500 dipping -2.45%, Nasdaq-100 losing -4.94% and Russell 2000 shedding -2.90%. Higher bond yields across U.S. treasuries yield curve forced risk assets lower, while US dollar, measured by DXY, was up 0.57%. Gold lost -2.79% while oil futures rose 3.78%.

In The Spotlight
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*In USD millions

Chinese and U.S. PMI
Purchasing Managers’ Index measures the sentiment for business activity. This is survey based and considered as a leading indicator, respectively for manufacturing and non-manufacturing sectors. Higher than expected print is generally bullish for currency, while lower than expected is bearish.
U.S. Non-Farm Payrolls
Released by the US Bureau of Labor Statistics presents the number of new non-agricultural jobs created during the previous month. Higher than expected print is generally bullish for USD, while lower than expected tends to be bearish.

Market Sentiment
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EURUSD

EURUSD has been testing 50-day Moving Average (MA) resistance throughout the week with no success. Price has been showing signs of consolidation as short-term MA-s are roped and have little air between them. Short-term MA-s do not offer visibility on the trend but medium-term the trend is bearish, while long-term bullish as 200-day MA is currently near 1.17860. RSI and Stochastic are both neutral and respectively 45.7 and 59.3. ADX does not offer quality signal with a reading of 13.3. DMI- of 25.0 dominates DMI+ of 21.3. Resistance level has formed near 1.21100, while support is near 1.20600

GBPUSD
EURUSD has retreated from swing highs to test 21-day Moving Average (MA). Price is currently below 8-day MA and seems to be picking up energy to break higher once again. Momentum indicators are all bullishly stacked and support continuous trend. RSI and Stochastic are both neutral, while DMI+ of 27.2 and DMI- of 19.6 signal bullish momentum. Resistance levels have formed near 1.39800, while support is near 1.39250

NZDUSD
The pair has dipped to 34-day Moving Average (MA) last week and is attempting to climb higher. Price is currently testing 8-day MA resistance. Momentum indicators are all bullish and support continuation of the trend. RSI and Stochastic are both neutral. DMI+ of 25.0 dominates DMI- of 20.5, signaling bullish momentum.

XAUUSD
XAUUSD pair is sinking to levels last seen in June 2020. Momentum indicators confirm bearish trend, with RSI of 35.6 still being neutral. Stochastic of 24.7 is nearly oversold. Weekly chart confirms the same trend, while price dipping below 50-period MA. ADX signals there is still energy in the trend, while DMI- of 35.6 confirms bearish sentiment. Resistance level is near 1,760.40, while support is near 1,732.00
 
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