China: PMIs decline, PBoC comfortable with USD/CNY trading range above 6.40 – TDS

China's PMIs slipped in June, with both the manufacturing and services PMIs softening, the latter more sharply. As a result, the composite PMI fell. However, all remained in expansion. Mitul Kotecha, Chief EM Asia and Europe Strategist at TD Securities, thinks PBoC is also comfortable with the current CNY trading range above USD/CNY 6.40.

China PMIs soften

“It was a mixed bag for China's purchasing managers indices (PMIs) in June. Weakness in services and a slight decline in manufacturing resulted in an overall decline in sentiment. The June manufacturing PMI slipped to 50.9 from 51.0 in May, still in expansion but at its weakest since February. Services continue to fare better, but the non-manufacturing PMI surprisingly slipped to 53.5 from 55.2 previously. As a result, the composite June PMI slipped to 52.9 from 54.2 in May, its lowest since February.”

“A weakening credit impulse as the authorities attempt to cap any build up in leverage, especially in the real estate sector, is expect this to cap manufacturing sentiment.” 

“Monetary policy is likely to remain relatively stable, with limited impetus to tighten policy rates and likely more PBoC emphasis on liquidity.”

“We think PBoC is comfortable with the current CNY trading range above USD/CNY 6.40. It is notable that CNY daily fixings vs. expectations have been more mixed recently, with no clear bias, unlike the bias for weaker fixings over previous weeks. Also the deviations between market expectations and actual fixings have also narrowed, suggesting some form of temporary equilibrium for CNY. Ahead of tomorrow's 100th anniversary of the Chinese Communist Party, CNY has remained within a relatively narrow range and we see little change unless the USD broadly moves more sharply.”