China Back in Focus, PMI Up Next

A credit squeeze in China helped set off a rare round of risk aversion Wednesday. It was a classic risk-off day with the yen leading and kiwi lagging. The focus stays on China in the hours ahead with the HSBC flash manufacturing PMI.

A jump in Chinese money market rates gave markets an excuse to reel in the recent one-way moves in markets. A disappointing outlook on global growth from heavy-equipment maker Caterpillar added to the negative sentiment.

The Australian dollar was particularly hard hit despite high CPI numbers released early in the day. The jump to 0.9756 followed by a plunge to 0.9618 traced a large outside reversal on the AUD/USD chart that could be the start of a larger retracement. It bears close watching in the day ahead but one good sign for the bulls was the stability of the pair in US trading – it couldn't break 0.9605 despite repeated attempts.

The USD/JPY chart posted a similar breakdown and touched below the 200-day moving average at 97.37. There was no follow through on the break and the pair managed to close just above the 200dma, avoiding the first close below the key technical level in 11 months.

The Bank of Canada rate decision had a predictable result, as Ashraf wrote about earlier, the growth downgrades were sizeable and with the BOC not forecasting 2% inflation until 2015, it's time for the market to seriously consider rate cuts.

A big factor for CAD and the rest of the market will be the performance of China's economy. The market was spooked by a full percentage point rise in 7-day repo contracts on talk of tightening liquidity to fight inflation and credit bubbles. A similar,(albeit extended) episode in July sparked a wave of selling in Chinese stocks and broader risk aversion but proved to be a blip. The market will be cautious this time.

One thing that could get a sustained reaction from markets is a deterioration in Chinese economic data. At 0145 GMT, HSBC releases its October Chinese manufacturing PMI. The consensus estimate is for a rise to 50.4 from 50.2. Otherwise, the calendar is quiet.