According to the most recent data, the Chinese manufacturing sector has been dealt a serious blow in the month of November.  The sector experienced one of the worst months in almost 3 years, and is indicative of potentially worse economic figures in the coming weeks.  But, what does this mean for the Asian powerhouse and the Australian economy?

For the month, the HSBC Flash manufacturing PMI report showed severe weakness in the country’s output sector.  The report printed a 48 reading in the month, compared to a higher 51 gauge in October – and below the benchmark 50 level, which indicates stable or unchanged growth.  The subcomponent indexes were even more pessimistic as new orders indexes fell to an almost 2 year low – built mainly on a sharp decline in domestic orders.  With the sector in contraction, other parts of the Chinese economy are likely to suffer, namely consumer sales and confidence figures in the coming weeks.  This will likely prompt government officials in taking action – especially with the notion that the country may now be entering a hard landing.

Initial options are likely to include lowering money market rates in order to boost the flow of credit.  This is a high possibility now that consumer prices are seemingly on the way down.  According to recent consumer price index readings, inflation in the Chinese economy slowed to 5.5% – led lower by plummeting food prices.  Subcomponent readings from the HSBC report also showed price declines – to the lowest levels since 2009.  The results make it easier for Beijing officials to justify lower interest rates, now that inflationary pressures seem to be dwindling.

Without any proactive stance against the impending slowdown, Chinese industrial output is expected to advance by only 11-12%.  This is a production pace not seen since the US financial crisis and  lower than recent output trends – around 14-15% annually.

And, if output declines, you can bet that companies will pullback on import orders from foreign economies, namely Australia.

Australia is one of China’s biggest trade partners, shipping over 250 million tons of iron ore in the last couple of years – along with other resources and agricultural exports.  The trade relationship has grown exponential in recent years, expanding up to over $80 billion a year – or double digit percent growth in the last two.

So, it’s no surprise that the recent figures in the HSBC report have some doubting the resiliency of the Australian economy.  Especially if one of the world’s fastest growing economies is showing weakness.  As a result, the sentiment will likely keep buyers out of the AUDUSD for the time being.

Already trading through the 0.9800 support level, the currency pair does have a chance to find support at the 0.9500 figure.  The last time the pair tested the level, was back in October, and it was able to find enough buying momentum to move higher.  Incidentally, the 0.9500 coincides with the bottom of a short term head shoulders technical pattern that preceded the recent longer term decline.