USD/CNH drops below $6.35 on PBOC rate cut

• USD/CNH takes offers to refresh intraday low, declines for the second consecutive day.
• PBOC cuts 1-year, 5-year LPR with 10 and five basis points respectively.
• Sino-American tussles regain market attention following Biden’s speech.
• Firmer yields can test USD/CNH bears, second-tier US data eyed.

USD/CNH refreshes intraday low to $6.3467, down 0.05% on a day during early Thursday following the People’s Bank of China’s (PBOC) rate cut.

The PBOC surprised markets by the first cut in the 5-year Loan Prime Rate (LPR), by 5 basis points (bps) to 4.60% in 21 months. The Chinese central bank also cut the 1-year LPR by 10 bps to 3.70% at the latest.

Read: PBOC slashes one-year and five-year loan prime rates to 3.7% and 4.6% respectively

It’s worth noting that the PBOC Deputy Governor Liu Guoqiang pledged to keep the yuan exchange rate stable the previous day but the reductions in the one-year Medium-term Lending Facility rate to 2.85% from 2.95% have already signaled the PBOC’s actions.

With the PBOC action, China’s 10-year Treasury yields remain pressured around the lowest levels since June 2020, at 2.72% by the press time.

On the other hand, the US 10-year Treasury yields pare the early Asian session gains but stay positive around 1.845%, up 1.8 bps.

It should be observed that the US-China yield spread shrank the most in three years the previous day and favored USD/CNH.

However, challenges concerning the Sino-American trade relations and the hawkish expectations from the US Federal Reserve (Fed), seem to probe the pair sellers of late.

Market’s sentiment soured earlier in the day on US President Joe Biden’s press conference as he touched various risk-sensitive issues ranging from Russia to China, not forget Fed. US President Biden said, “China is not meeting its purchase commitments,” but also mentioned Chief Trade negotiator Katherine Tai’s efforts to placate Sino-American trade tussles.

Biden also praised Fed Chair Jerome Powell’s push to recalibrate the support also raised concerns over faster rate hikes and balance sheet normalization.

Read: US President Biden: Inflation has everything to do with supply chain

Moving on, further developments over the US-China story and the Fed updates, not to forget geopolitics and stimulus, will entertain USD/CNH traders. That said, US Jobless Claims, Philadelphia Fed Manufacturing Survey for January and Existing Home Sales for December will decorate today’s calendar.

Technical analysis

A daily closing below the six-week-old ascending support line, near $6.3450, becomes necessary for the USD/CNH bears to challenge the 2021 bottom surrounding $6.3305. Failing to do so can trigger corrective pullback towards a fortnight-old resistance line near $6.3585.