Yuan drops below 7.2900 on PBoC moves, multi-year high US-China yield gap

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• USD/CNH bounces off intraday low but defends week-start bearish move.
• 10-year yield gap between US and China jumps to the highest since 2007.
• Markets fear more China stimulus, further downside for Yuan amid economic pessimism.
• US Dollar’s preparations for Jackson Hole Symposium allow USD/CNH to pare recent gains.

USD/CNH rebounds from a one-week low, marked earlier in the day, as it picks up bids to 7.2880 as markets in China open for Tuesday. In doing so, the offshore Chinese Yuan (CNH) justifies the People’s Bank of China’s (PBoC) efforts to defend the currency, as well as a growing gap between the US and Chinese Treasury bond yields.

PBoC’s successive Open Market Operations (OMO) and the previous day’s rate cuts prod the Yuan buyers, especially amid the sour sentiment. On Tuesday, the PBoC’s daily OMO suggest a net drain of around 93 billion Yuan on the day.

That said, Bloomberg came out with an analytical piece suggesting the market’s lack of confidence in the PBoC’s ability to defend the Yuan. Also weighing on the Chinese currency are the fears of witnessing strong wage growth from the US.

Late Monday, the Federal Reserve Bank of New York unveiled its SCE Labor Market Survey results late Monday that suggested record wage expectations and could have contributed to the latest risk-off mood, as well as firmer bond yields. “The Lowest wage respondents would be willing to accept for a new job jumped to a record high of $78,645 in July, up from $72.873 a year ago,” said the findings.

Elsewhere, the difference between the 10-year US and Chinese Treasury bond yields jump to the widest since 2007.

Furthermore, sour sentiment also puts a floor under the USD/CNH Price. That said, S&P500 Futures register the first daily loss in three while fading the previous two-day rebound from a nine-week low, down 0.15% intraday to 4,405 by the press time, as the S&P Global Ratings downgrades several US banks while highlighting the negative impacts of the higher rates and a decline in deposits. It’s worth noting that Moody’s initiated such moves early in August and triggered the risk-off mood.

Additionally, rumors about Chinese warship damage in Taiwan Strait also challenge the USD/CNH bears.

Moving on, China news and yields may entertain the USD/CNH traders while the US Existing Home Sales for July and Richmond Fed Manufacturing Index for August will join speeches from the mid-tier Federal Reserve (Fed) officials to entertain the intraday traders.

Technical analysis

USD/CNH bears need a daily closing beneath a one-month-old rising support line, close to 7.2815 by the press time, to retake control.