USD/CNH drops to one-week low around $6.44 as PBOC defends yuan bulls

• USD/CNH prints two-day downtrend, pokes weekly low.
• PBOC set Yuan mid-point at highest in 17 days, CFETS trade-weighted index jump to February 2016 levels.
• US dollar remains depressed amid indecision over Fed tapering following Friday’s NFP disappointment.
• Sino-American tussles escalate over phase one deal commitments, Taiwan issues.

USD/CNH struggles around an intraday low of $6.4375, down 0.10% on a day near $6.4400 during early Monday.

In doing so, the offshore Chinese Yuan (CNH) pair takes clues from the People’s Bank of China’s (PBOC) efforts to defend the domestic markets from the financial risks emanating from real-estate companies’ defaults.

As per the latest updates, the PBOC sets Yuan mid-point at the highest since September 16 around 6.4479. Also helping the CNH is Reuters’ calculation showing CFETS trade-weighted yuan basket index at the highest levels since February 2016. China Foreign Exchange Trade System (CFETS) is a unit of the PBOC that manages the RMB (yuan, CNY) basket. Additionally, global rating giant Moody's stay optimistic over China's economic growth and favor CNH bulls. "Ff China's power cuts are short-lived the effects on GDP will be limited," said Moody's.

On the other hand, the US Dollar Index (DXY) extends Friday’s Nonfarm Payrolls (NFP)-led losses, favoring the USD/CNH bears. That said, the quote remains pressured around 94.10 by the press time. NFP dropped to 194K versus 500K expected but the prior reading got an upward revision to 366K. On the same line, the Unemployment Rate dropped to 4.8%, versus 5.1% expected and 5.2% prior, soothing the pains, whereas Average Hourly Earnings also jumped past 0.4% expected and revised down previous readouts of 0.4% to 0.6%.

Elsewhere, US Trade Representative (USTR) Katherine Tai and China's Vice Premier Liu He’s latest virtual talks, during the weekend, couldn’t offer any positive details as policymakers remain at loggerheads. Reuters quotes USTR officials to say, “Tai's future engagement with China would depend on "how China responds to tonight's call" and declined to discuss possible next steps, but added that Tai would not seek Phase 2 negotiations.”

It’s worth observing that Taiwan recently rejected China President Xi Jinping’s call for ‘reunification’. On the same line, Hong Kong Leader Carry Liam said, “China to take account of Hong Kong status in sanctions law.”

Amid these plays, S&P 500 Futures print mild losses while the US bond trading remains at a halt during the Columbus Day partial off. Given the lighter calendar and US holiday, risk catalysts are the key for fresh impulse.

Technical analysis

A daily closing below an ascending support line from May 31, near $6.4425-30, becomes necessary for the USD/CNH bears to challenge September’s low at around $6.4240.