China’s RatingDog Manufacturing Purchasing Managers’ Index (PMI) fell to 51.8 in May from 52.2 in April, according to data published on Monday. The market had forecast a 51.4 reading, putting the outcome above expectations despite the month-on-month decline.
Following the release, AUD/USD was trading around 0.7183 and was up 0.01% on the day at the time of writing. A correction issued on 1 June at 01:50 GMT clarified that the PMI declined rather than rose.
Chinese Manufacturing Momentum Slows Amid Market Expectations
The new data on Chinese manufacturing for May shows the expansion is slowing down, dropping to 51.8 from 52.2. While this is a decline, it came in better than the market feared, which is why the initial reaction was muted. We see this as a signal that the post-pandemic recovery momentum is moderating, but not collapsing.
This reading puts a spotlight on industrial commodities that depend on Chinese demand. We see recent data showing iron ore port inventories in China have risen to over 145 million tonnes, a two-year high, which supports the idea of weakening immediate demand. For the next few weeks, we are looking at buying puts on commodity ETFs or shorting copper futures as a way to position for a potential price softening.
Market Response and Outlook for Australian Dollar and Commodities
The Australian dollar, a key proxy for China’s economic health, barely moved, holding around 0.7183. This tells us the market was already positioned for a slight slowdown. With implied volatility on AUD/USD options contracts currently near yearly lows of around 8.5%, we believe buying puts on the currency is a relatively cheap hedge against further negative data from China.
Looking ahead, our attention will be on China’s upcoming industrial production and credit growth figures to confirm this cooling trend. Historically, when the PMI has trended down for two consecutive months, it has often preceded a 3-5% drop in the AUD/USD pair over the following quarter. This pattern makes us cautious and encourages holding some bearish positions as a protective measure.
