Chinese Manufacturing PMIs and dovish Fed may cushion temporary aid to CNY, supply driven turn in commodities questionable

Chinese manufacturing and non-manufacturing PMIs have produced upbeat numbers at 50.2 and 49.1 respectively against forecasts at 49.3 and 48.3.

These upbeat numbers that indicate how  economic strength and businesses react swiftly to market environment, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy.

Since late 2015 that the dollar had topped versus the yen and euro, and now most oil related currencies have been added to that list.

Several pairs like CNY can still make new cyclical lows on idiosyncratic issues.

A narrower USD rally over the next year doesn’t prevent broad strength at times when the Fed returns or China relapses, which is why many forecasts still show oscillations and why trades will remain quite tactical.

Trend acceleration in EM/China growth, Similar to cancelling the Fed cycle, an acceleration in EM growth would drive substantial USD weakness given the implications for commodity prices and cross-border capital flows.

No surprise then that divergences between emerging markets and developed markets growth have explained about 50% of the moves in the trade-weighted dollar over the past decade, observe the above chart that explains the EM-DM growth gap explains about half the movements in the trade-weighted USD given implications for capital flows and commodity prices.

The surprise would come if EM growth actually accelerates in 2016, given the range of common constraints (excess leverage in regions but Central Europe) and local ones (excess capacity and weak corporate profits in China, politics in Brazil). Even in China, where policy stimulus is obvious.

Industrial production and fixed asset investment are to only stabilise around current levels (6% and 10%, respectively) rather than accelerate.

If we were surer that the Fed would never hike again, that it would tolerate rising inflation indefinitely, or that EM growth would accelerate, we would change forecasts broadly, since the current deck only shows the dollar having made its cyclical highs versus the euro, yen, a few oil currencies (CAD, RUB) and the only commodity exporter with falling unemployment (AUD).

In January, the World Bank Lowers 2016 Forecasts for 37 of 46 Commodity Prices, Including Oil. Even though the commodity market was in consolidation pattern in February 2016, especially, energy price gaining 1.8%, and non-energy commodities rose 1.7%, Food prices increased by 1.8%, March month series have been very tepid.