Is a global cyclical recovery underway?

China reported a June manufacturing PMI 50.9 vs. 50.5 consensus and non-manufacturing PMI 54.4 vs. 53.6 consensus.

Cyclical currencies should outperform in an environment where investors are more focused on improving activity data than on more medium- to long-run structural concerns that are proving to be a headwind for high-carry FX Asia these days.

The Yuan is strengthening on back to back domestic data beats which continue to power the economic differentiation factors in the local currency market sentiment where the CNH could now outperform given traders’ proclivity to go long CNH on the Asia cross.

The global economy unambiguously remains in a cyclical upswing, except for pockets of weakness.

In the US, business activity surveys and recent housing data have propelled surprise indices to new highs. However, further declines in US real yields (10y -0.72%) imply greater pessimism around the long-term systematic outlook, which continues to argue for gold as a critical component in any portfolio.

Oil is trading a little lower in Asia on likely profit-taking as mixed data from North Asia tempered the bull run. But China PMI should put a bid back under oil prices.

The better-than-expected China PMI lends further weight to the argument that a global cyclical recovery is well underway that should boost global stock market sentiment.

In the same light, it should be equally positive for high beta and cyclical currencies (e.g., AUD, CNH, KRW, and TWD).

At the moment, it is less clear whether a recovering China still benefits commodity producers as oil prices are not precisely firing upwards likely due to the inventory overhang concerns coupled with a higher probability of US production coming back online as oil prices move higher.

Oil sensitive currencies – Norwegian Krone, Canadian dollar and Malaysian Ringgit need an enduring oil price recovery to gain further traction versus the US dollar.

So, while longer-term oil market structural concerns linger, cyclical currencies are more attractive, with the standouts in Asia CNH and KRW top of the pecking order.

An oil market aside

But as I commented last week, there is a remarkable propensity for Asia oil traders to book profits after bullish moves during US peak trading hours. Many traders were expecting price dip in the Asia trade. But smart money does not care from who they buy their barrels.

International markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp