An Upbeat PMI Data From China Sparks Risk-on Mood: Forex-Dollar Rally on Hold

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The dollar eased on Wednesday after upbeat China purchasing managers index (PMI) data sparked a risk-on mood among investors.

China’s manufacturing activity expanded for the first time since April 2012, surpassing market expectations and providing a much-needed boost to sentiment.

The news resulted in a rally across regional currencies, especially those pegged to China’s yuan. The Australian dollar and New Zealand dollar were among the largest beneficiaries of the robust Chinese economic data, with both currencies rising sharply against the US dollar.

Christopher Wong, a currency strategist at OCBC, said, “The strong set of China PMIs breathed some life into China reopening trade.”

The onshore yuan rose 0.4% to 6.9040 per dollar, its highest level, while the offshore yuan jumped a more pronounced 0.6% to 6.9143 per dollar, its most elevated point. The appreciation of the Chinese currency was attributed mainly to the positive China PMI data.

The New Zealand dollar surged 0.52% to $0.62165 on Wednesday following the release of upbeat Chinese PMI data. The risk-on sentiment bolstered the market currency as investors saw an opportunity to capitalize on a more robust Chinese economy.

Meanwhile, the Australian dollar also gained 0.3%, reaching $0.6749, reversing its early slide to a two-month low following soft domestic economic data earlier in the day.

“I think market participants will pay a close look to the January CPI indicator to gauge the near-term outlook for RBA policy,” said Carol Kong, a currency strategist at the Commonwealth Bank of Australia (CBA).

Analysts noted that investors were now focusing on China’s economic rebound, despite widespread caution related to localized restrictions and social distancing measures in some parts of Australia and New Zealand due to rising coronavirus cases.

Christopher Wong from OCBC said this shift of attention could indicate that investors now believe “China reopening trade has more potential upside than downside risk” in the future.

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