Aussie Dragged Down By Chinese PMI Miss, Loonie Stays Pressured

Asian markets are mostly lower following weak manufacturing data from China. The flash reading of HSBC China manufacturing PMI unexpectedly dropped to 49.6 in January versus consensus of 50.4. That;s also the first contraction reading in six months. HSBC chief economist for China noted that the "marginal contraction" was "mainly dragged by cooling domestic demand conditions". And, that "implies softening growth momentum for manufacturing sectors". HSBC urged China to tilt policy towards support growth to "avoid repeating growth deceleration seen in 1H 2013". The final HSBC manufacturing PMI will be released on January 30, to be followed by the official manufacturing PMI on February 1. Also released from China, conference board leading indicator rose 0.4% in December.

In response to the Chinese data, Aussie reversed much of yesterday's gains and is back pressing 0.88 handle against dollar for the moment. While the stronger than expected inflation reading dented the hope for another rate cut from RBA in near term, the impact of the currency is so far rather weak. Technically, the AUD/USD's recovery was limited by 4 hours 55 EMA and well below the key 0.9085 near term resistance level. And outlook stays bearish or next key cluster support level between 0.85/86. The NZD/USD also dips mildly following the release and is struggling below 0.83 for the moment. Also released today, Australia consumer inflation expectation rose 2.3% in January. New Zealand business manufacturing index dropped to 56.4 in December.

Talking about commodity currencies, the Canadian remains the weakest one this week, and this year, so far. The loonie suffered another round of selloff after the dovish BoC statement yesterday. BoC noted that "the path for inflation is now expected to be lower than previously anticipated for most of the projection period." And, "downside risks to inflation have grown in importance". The central bank noted that, "next change to the policy rate will depend on how new information influences this balance of risks" between inflation and "household imbalances". That is, BoC is now leaving the door open for rate cut should inflation outlook worsens.

Looking ahead, PMI data will be the major focus in European session. General improvements are expected in French, German and Eurozone PMIs. In US session, Canadian retail sales will be a focus together with US existing home sales and jobless claims.