Market sentiment worsened again in the Asian trading session on Wednesday (31/May). The Purchasing Managers' Index (PMI) report from China's manufacturing sector showed a sustained negative trend. 

Somehow, this was triggering a sell-off in most major currencies and prompting a recovery in the United States dollar. The USD index or it is also known as DXY had moved about 0.5% to a daily high of 104.57.

It could be seen when this news was written at the beginning of the European session. Meanwhile, NZD/USD fell by 0.75% and AUD/USD slumped by 0.60% to their respective lowest levels since November last year.

The Australian dollar exchange rate was squirming due to a decrease in the risk of a default in the United States. An increase in the chances of an RBA rate hike was also the cause.

The Aussie Dropped

The release of Australian inflation data this morning showed an upward pressure on prices remains tight and may require another rate hike. However, the publication of the Chinese report afterwards immediately dropped the Aussie. 

China's National Bureau of Statistics reported the Manufacturing PMI score slipped from 49.2 to 48.8 in May 2023. Meanwhile, the consensus expects an improvement to 51.4. 

The Non-manufacturing PMI also slipped from 56.4 to 54.5 in the same period, missing the consensus estimate pegged at 54.9. Both reflect that China's economic recovery is losing energy.

It must be known that Aussie is a pro-growth currency. It has a lot to do with the commodity outlook, as said by Rodrigo Catril, who is known as a senior forex strategist at 

The Sell-off Action is Continued 

Furthermore, Catril also said that the lack of positive news from China exacerbated concerns over the prospect of falling commodity prices, thus "defeating" speculation of tighter monetary policy. 

The recovery in that country, or lack thereof, is an important theme for G10 currency markets. This opinion was shared by Shusuke Yamada of Bank of America in Tokyo, 

If everything else stays the same, a weak China is positive for the U.S. dollar, and Positiv r the yen to some extent. It was especially compared to the euro or Aussie.

The sell-off against non-safe haven currencies continued at the beginning of the European session. The EUR/USD duo slumped about 0.7% to 1.0660, while GBP/USD fell 0.5% to 1.2350.

Some Components Caused the Worse Contraction 

The worsening contraction in China's manufacturing sector was largely due to declines in some components. The new orders sub-index fell from 48.8 to 48.3.

Meanwhile, the export orders sub-index fell from 47.6 to 47.2; This indicates continued weakening of demand from abroad. Along with declines in the manufacturing sector, China's Non-Manufacturing PMI weakened from 56.4 to 54.5 in May. 

Although still in a state of expansion, the pace of development has continued to slow down in the last 3 months. It was showing the attitude of consumers who have begun to hold back their spending on the service industry.

Referring to the release of manufacturing data, it can be seen that the level of prosperity of that country’s economy has shrunk. The foundations of economic recovery seem to be fragile.

Economic Recovery Runs Out of Steam

It seems that development needs to be consolidated further as said by Zhao Qinghe. Qinghe is known as tge NBS senior statistician. China's economic recovery momentum seems to run out of steam.

That was especially when entering the second quarter of this year. Key components such as consumer spending and property continue to struggle to recover after falling sharply in the past three years due to the pandemic. 

The condition is further exacerbated by the increase in youth unemployment when the age group of children switches to productive age. In addition, disappointing retail sales and industrial output continue to overshadow the economic recovery there in the second quarter of 2023.