The Chinese economy remains weak, according to the PMIs released this morning. The manufacturing index fell slightly, remaining below 50 for the third consecutive month, while the non-manufacturing index (services and construction) fell to 50.2, the lowest level ever recorded (except for 4 months when acute coronavirus outbreaks led to lockdowns) , Commerzbank’s FX analyst Volkmar Baur notes

Dovish Fed can provide significant relief for the CNY

“Hopes for a quick stimulus from the government were also dashed yesterday after the Politburo meeting ended without any significant signs of action. The further decline in the construction sub-index suggests that China's real estate crisis is not over and will continue to weigh on the economy.”

“This will also have an impact on price developments. The price components of the PMI suggest that producer prices fell again in July compared with the previous month. As a result, the annual rate, which had battled its way out of negative territory toward zero in recent months, is likely to fall back into negative territory.”

“However, the CNY was unperturbed this morning and rose slightly against the US Dollar. While it is important not to over-interpret every move in a managed currency, the exchange rate is likely to be more influenced by the USD in the coming days anyway. A dovish Fed could provide significant relief for the CNY.”