In January, China’s Producer Price Index (PPI) deflation is expected to have eased to 1.5% year-on-year. This change is due to month-on-month increases in metal and energy prices. The Consumer Price Index (CPI) inflation likely dropped by 0.2 percentage points to 0.6% year-on-year for the same period, which can be attributed to base effects.
The report predicts a 0.3% monthly rise in the PPI, driven by higher metal and energy prices. The core CPI seems to have risen, influenced by gold prices and seasonal factors.
Geopolitical Risks Affecting Manufacturing
The official manufacturing Purchasing Managers’ Index (PMI) showed a slight decline, indicating a cautious outlook amid ongoing geopolitical risks. This information comes from the FXStreet Insights Team, which collects market observations and insights.
The decrease in China’s producer price deflation to -1.5% in January is a key indicator. It suggests that the worst factory-gate price drops affecting the industrial sector since 2025 may be over. We should now prepare for a possible cyclical recovery in Chinese manufacturing and its effects worldwide.
This change is primarily due to rising commodity prices, so we should focus on industrial metals and energy derivatives. With copper prices recently exceeding $9,800 per tonne on the LME for the first time this year, we are considering long positions through call options on copper futures. This strategy seems supported by a potential restocking cycle in China that could tighten the market in the coming weeks.
Reacting to Improved Inflation Data
We are also reevaluating Chinese equity indices, which faced challenges last year. The Hang Seng Index hit multi-year lows in the third quarter of 2025. This improving inflation data could spark a sustained rebound. We see opportunities in buying call spreads on indices like the CSI 300 to benefit from a gradual recovery in corporate profits.
The currency market is likely to respond, especially with commodity-linked currencies. The Australian dollar has already strengthened to over 0.6700 against the USD, partly due to stable iron ore prices near $135 per tonne. We believe that further signs of a strengthening Chinese economy could lift AUD/USD higher, making long positions in AUD futures or options an appealing strategy.
However, caution is essential, as the official manufacturing PMI for January was 49.7, indicating a slight contraction. This suggests that the recovery is still fragile and not yet widespread. Therefore, using defined-risk option strategies is wise to protect against potential setbacks or a slower-than-expected economic rebound.
Create your live VT Markets account and start trading now.
here to set up a live account on VT Markets now
