Another Chinese Manufacturing Industry Meltdown?

Newsflash! China’s HSBC flash manufacturing PMI for February sank to a 7-month low of 48.3, weaker than the estimated 49.4 reading and the previous 49.6 figure. This suggests that the world’s second largest economy is entering a slowdown in its manufacturing industry, but what’s interesting is that we’ve already seen this before.

A quick review of the economic calendar would show that China churned out the exact same figure back in June last year, also coming from a previous reading of 49.6. An eerie coincidence, if you ask me!

What’s more interesting is that the next month followed it up with an even lower reading of 47.7, reflecting a deeper contraction in the manufacturing sector. Take note that this HSBC report is one of the earliest indicators released by China and as such, it often hints at how other aspects of the economy might fare.

A closer look at the components of the PMI reveals that output, new orders, and stockpiles surprisingly declined while hiring fell at a faster pace, hitting its lowest level since 2009. Input and output prices also posted sharper drops for the month.

The fact that this situation is nothing new spells bad news for China, but the good news for us traders is that we can review past price action to have an idea of how to grab pips off this scenario. Here’s how AUD/USD reacted the last time China’s HSBC flash manufacturing PMI indicated an industry slowdown:

AUDAUD/USD made a strong break below the .9700 long-term support level and tumbled by roughly a couple hundred pips when the index first dipped below the 50.0 mark back in May 2013. The following month saw another weak PMI reading, which pushed the pair lower by nearly 300 pips, then July’s 47.7 figure extended the selloff below the .9000 mark.

This year, the pair has already been in a decline since the January HSBC flash manufacturing PMI sank back into the contraction zone. Could this mean that AUD/USD is ready to break below the next support level around .8700-.8800 sooner or later? Let us know what you think by voting in our poll!