USD/CNH drops below 6.9200 on China PMI, recession woes, hawkish Fedspeak test bears

• USD/CNH prints the first daily negative in four but bears remain cautious.
• China’s official PMI came in firmer for August but fears surrounding covid conditions, Taiwan challenge CNH bulls.
• Firmer US data, hawkish Fedspeak underpin US dollar’s demand ahead of the key NFP data.
• US ADP Employment Change, risk catalysts may entertain traders.

USD/CNH remains pressured around the intraday low of 6.9135 after China flashed upbeat activity data for August during Wednesday’s Asian session. In doing so, the offshore Chinese yuan (CNH) pair snaps a three-day uptrend around the highest levels in two years.

That said, the headline NBS Manufacturing PMI improved to 49.4 in August versus 49.2 expected and 49.0 prior whereas the Non-Manufacturing PMI also grew to 52.6 during the stated month compared to 52.2 market forecasts and 53.8 previous readings.

Firmer data from China also joined cautious optimism in the markets to weigh on the USD/CNH prices. However, challenges emanating from China’s covid conditions and the Sino-American tussles over Taiwan and the hawkish Fed seem to keep the pair buyers hopeful.

Taiwan’s firing of the warning shots for 1st time at a Chinese drone, per Reuters, as well as the Wall Street Journal’s news stating that the US Army grounds entire fleet of Boeing-made Chinook helicopters highlight escalating woes. Also challenging the sentiment are the coronavirus fears as mainland China had confirmed 243,081 cases with symptoms as of August 30, per Reuters. The news also mentioned that China's capital Beijing and the financial hub of Shanghai reported one new local symptomatic case each while China's southern technology hub of Shenzhen reported 37 new locally transmitted COVID-19 infections on Tuesday, up from 35 a day earlier.

On the other hand, firmer US data allowed the Fed policymakers to defend their aggressive bias toward the rate hike.

On Tuesday, US Consumer Confidence for August improved to 103.2 versus 95.3 in July, per the Conference Board’s (CB) latest survey details. Also, US Housing Price Index (HPI) rose by 0.1% MoM in June compared to May's increase of 1.3% and market expectation of 1.1%. Further, the S&P/Case-Shiller Home Price Indices eased to 18.6% YoY during the stated month versus 19.5% forecast and 20.5% previous readings. It should be noted that the US JOLTS Job Openings grew to 11.239M in July versus 10.475M expected and 11.04M prior (revised from 10.698M).

Following the data, Richmond Federal Reserve Bank President Thomas Barkin said, "I don't expect inflation to come down predictably." On the same line was Atlanta Fed President Raphael Bostic who said, “Slowing inflation data 'may give us reason' to slow interest rate hikes.” Recently, New York Fed President John Williams said, per the WSJ, “We are not at restrictive policy yet.” The policymaker also added, “We need to get interest rates higher than longer run a neutral level.”

While the S&P 500 Futures and the US 10-year Treasury yields portray mildly positive sentiment and favor USD/CNH bears, the pair’s further weakness hinges on the US ADP Employment Change for August, the early signal for Friday’s US Nonfarm Payrolls (NFP), expected 200K versus 128K prior.

Technical analysis

USD/CNH pullback remains elusive until breaking a three-week-old support line, near 6.8830 by the press time.