BUZZ-COMMENT-Spreads, trade possibilities have USD/CNH nearing a sharp fall

Feb 20 (Reuters) - USD/CNH erased gains and fell away from its 10-day moving average on Thursday and yield spread differentials, hopes for easing trade tensions, and technicals suggest a much deeper decline may be in the cards.

U.S. yields US2YT=RR fell Thursday after Walmart's WMT.N 2026 profit forecast did not meet estimates. This may be a sign U.S. consumers are pulling back, which may lead to slower economic growth.

Slightly above estimate U.S. weekly jobless claims and a sharp drop in the February Philly Fed employment index added weight on U.S. yields.

The softness helped erode the dollar's yield advantage over the yuan as U.S.-China 2-year spreads, which USD/CNH is correlated with, hit their tightest since mid December.

President Trump said Wednesday a new trade deal with China is possible which fueled hopes trade ties will improve.

U.S. investment bank Morgan Stanley's upbeat report on China equities could help underpin the yuan as could iron-ore's DCIOc2 rally to levels not seen since mid-July.

Meanwhile, technicals highlight downside risks for USD/CNH.

The pair is holding below its 10-DMA along with falling daily and monthly RSIs, which are bearish signals.

The monthly RSI, while flashing a bearish divergence, didn't confirm USD/CNH's high struck on February 3.

Support for USD/CNH sits in the 7.2250/7.2350 zone and at the 200-DMA.

Should these levels break, a drop below 7.1000 cannot be ruled out.

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