width=266Release: China Manufacturing PMI (Jan) Consensus Forecast: 49.8 Previous: 50.3 Date/Time: 01/31/12 8:00PM ET (01:00 GMT, 02/01)
Release: HSBC Manufacturing PMI (Jan) Flash Reading: 48.8 Previous: 48.7 Date/Time: 01/31/12 9:30PM ET (03:30 GMT, 02/01)
China Manufacturing PMI Important to Sentiment, Commodities, and Aussie

The government's CFLP official version for the Manufacturing PMI is expected to show a month of contraction - albiet very slight - with a reading of 49.8. In December the PMI registered at 50.3, but was below the 50 threshold separating expansion from contraction in November.

China's manufacturing sector is important to risk sentiment because it drives expectations about global growth and demand for commodities. China makes up much of the marginal capacity when it comes to commodities, and if the industrial sector is contracting that would mean less demand for iron ore, coal, and copper, which dampens commodity prices, and weakens earnings potential at firms from places like Australia and South Africa - thereby hurting stocks.

A reading better than 50 could help support risk appetite and equities, which were weaker in the NY trading session. If the consensus forecast holds, then the manufacturing sector would have contracted 2 out of the last 3 months and would tell us that China's growth, which has been decelerating already, may continue to do so in 2012.

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Therefore the risk dynamics play is fairly straightforward.

A weaker than expected reading will hurt equities, commodities, and higher yielding commodity and growth sensitive currencies like the Australia, New Zealand, and Canadian Dollars.

Though the most impact will likley be on the AUD which is a major exporter to China, so we'll pay particular attention to it during the release.

Final Version of HSBC Manufacturing PMI to Show Contraction

But first, we already received the preliminary reading for the HSBC version of the manufacturing PMI (which tends to track smaller firms compared to the government's reading which is better at tracking larger manufacturers).

In January the manufacturing sector continued to show weakness, with a reading of 48.8, below the 50 level separating expansion and contraction.  It was 48.7 in December, so a very slight uptick.

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Production contracted at a faster rate in December, but the overall index turned up slightly.

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New orders rebounded to the 50 level and new export business was in expansionary territory, 2 positives from the release. We'll see if the final version changes much of the picture here.

AUD/USD Critical Juncture After pullback

The AUD/USD was weaker in the NY trading session against the USD, as weak US data and concerns about Europe created conditions for a sell-off in the EUR/USD and risk assets.

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The pair tested the 61.8% retracement of the recent upswing. While there might be some consolidation ahead of the Chinese data, where if falls can have an important impact on the fate of the AUD/USD, as it flirts with a double top.

Better than expected Chinese manufacturing data can help bolster sentiment and lift the AUD/USD back to a retest of its highs for this week (1.0680), or it could be a catalyst for the Aussie to break the recent support (1.0586) and move towards a full retracement of recent rally (1.0535).

See Technical Analysis of the AUD/USD pair in today's technical update: AUD/USD is Setting up Range Between 1.0683 and 1.0525

Nick Nasad is the Chief Market Analyst at IBTrade and FXTimes  - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.