In January, China’s Producer Price Index (PPI) deflation is estimated to have eased to 1.5% year-on-year, attributed to month-on-month increases in metal and energy prices. The Consumer Price Index (CPI) inflation possibly decreased by 0.2 percentage points to reach 0.6% year-on-year during the same period due to base effects.
The report estimates a 0.3% monthly increase in the PPI, driven by higher prices of metal and energy. Meanwhile, core CPI appears to have experienced a rise influenced by gold prices and seasonal factors.
Geopolitical Risks Affecting Manufacturing
The official manufacturing Purchasing Managers’ Index (PMI) showed a minor decline, reflecting a cautious outlook amid ongoing geopolitical risks. This information was compiled by the FXStreet Insights Team, which gathers market observations and insights from commercial and external analysts.
The easing of China’s producer price deflation to -1.5% in January is a critical signal for us. This suggests that the worst of the factory-gate price declines, which plagued the industrial sector throughout 2025, may be behind us. We should now position for a potential cyclical recovery in Chinese manufacturing and its global impact.
This shift is largely driven by rising commodity prices, so our focus should turn to industrial metals and energy derivatives. With copper prices recently climbing above $9,800 per tonne on the LME for the first time this year, we are considering long positions through call options on copper futures. This move seems supported by a potential restocking cycle in China that could tighten the market further in the coming weeks.
Reacting to Improved Inflation Data
We are also reassessing Chinese equity indices, which faced significant headwinds last year. After the Hang Seng Index touched multi-year lows in the third quarter of 2025, this improving inflation data could provide a catalyst for a sustained rebound. We see opportunities in buying call spreads on indices like the CSI 300 to capitalize on a gradual recovery in corporate profits.
The currency market will likely react, especially commodity-linked currencies. The Australian dollar has already strengthened to over 0.6700 against the USD, partly on the back of stabilized iron ore prices near $135 per tonne. We believe further signs of a firming Chinese economy could push AUD/USD higher, making long positions in AUD futures or options an attractive strategy.
However, we must remain cautious as the official manufacturing PMI for January came in at 49.7, still indicating a slight contraction. This suggests the recovery is fragile and not yet broad-based. Therefore, using defined-risk option strategies is prudent to protect against any setbacks or a slower-than-expected rebound in economic activity.
