USD/CNH retreats as US dollar is faded in a significant move

• USD/CNH, a break below 6.8485 could be a significant turning point in the currency.
• Near term, 6.8600 needs to hold in a break of trendline support. 

China's yuan slumped to its lowest level since July on Monday with Beijing stepping up its easing measures in the wake of an economic crisis and the resurgence of COVID-19 that has led to economic crippling lockdowns. However, in trade on Tuesday, the bears are taking on the bulls across US dollar pairs and CNH is making a comeback. 

At the time of writing, USD/CNH is trading at 6.8650, flat compared to the prior session but heading lower from the highs nonetheless. The price has fallen from a high of 6.8743 to a low of 6.8625. Meanwhile, there are opinions circulating that more cuts are to come. After a monthly meeting, the PBOC lowered the one-year loan prime rate by 5 basis points to 3.65% from 3.7%, while the five-year rate was cut by 15 basis points to 4.3% from 4.45%, reducing the cost of payments on existing loans. However, the news that policymakers have trimmed lending rates was taken as only a minor positive due to the deepening troubles in the economy.  

''We also do not expect either of these cuts to move the needle as far as the economy is concerned, with GDP growth still on track to fall below the official "around 5.5%" target. In particular, the housing market will need much more significant policy action to reverse current pressures,'' analysts at TD Securities argued. 

In trade today, China's Securities Times reported that China may reduce RRR this year to compensate for MLF maturity. The article states that RRR cuts may lower lending prime rates. It is with noting that this is a state-run agency reporting such opinions. Meanwhile, widening policy divergence between the US and China, along with worries over weaker economic fundamentals, raised the risks of capital outflows which could be a continued weight on the yuan and supportive of the greenback in light of such opinions from the state media news company. 

USD/CNH H1 chart

The price could be on the verge of a move beyond support levels should the US dollar blow off to the downside. That being said, the Jackson Hole could offer a hawkish surprise and traders could be reluctant to bet against such a scenario. Nevertheless, there is time for moves in the markets and a break below 6.8485 could be a significant turning point in the currency. Near term, 6.8600 needs to hold in a break of trendline support.