China's yuan rebounded on Tuesday from a more than two-year low in the previous session, after the authorities rolled out fresh policy measures aimed at stabilising its recent rapid fall.

The People's Bank of China (PBOC) said on Monday it would cut the amount of foreign exchange reserves that financial institutions must hold, a step seen aimed at slowing the yuan's fast depreciation. The central bank has set firmer-than-expected yuan midpoint guidance rates in recent sessions.

The onshore yuan lost more than 2% on the dollar in August pressured by a buoyant greenback and a slowing domestic economy. "The goal is clearly to stabilise the CNY against the backdrop of a fast appreciating USD, as an extension of a clear strengthening bias in daily fixing," said Becky Liu, head of China macro strategy at Standard Chartered. But Liu added the move was "insufficient" to trigger a turnaround in the yuan and expected the unit to test the psychologically important 7 per dollar level in coming weeks.

A number of major investment houses have also cut their yuan forecasts recently, with some expecting a breach of the key milestone before next month's politically sensitive Party Congress, despite authorities' efforts to slow its slide. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.9096, the weaker side of the key 6.9 per dollar level for the first time in two years. That was 98 pips or 0.14% weaker than the previous fix of 6.8998. Still, the fixing was much stronger than market projections for the 10th consecutive trading day, and it was 208 pips firmer than Reuters' estimate of 6.9304. Traders and analysts interpreted the firmer-than-expected guidance as part of official efforts to rein in the softening yuan.

The yuan's 6.9 per dollar level has long been seen as the last supportive level before breaching the critical 7 mark. "The PBOC might have tolerance for further CNY depreciation against the USD, especially as the broad USD continues to strengthen, though they might want to avoid continued and too fast one-way depreciation if possible," analysts at Goldman Sachs said in a note. In the spot market, the onshore yuan rebounded from a more than two-year low of 6.9445 per dollar hit in the previous session to trade at 6.9396 by midday.

That was 66 pips weaker than the previous late session close. Its offshore counterpart followed suit and traded at 6.951 per dollar at midday. Several currency traders said they don't expect the PBOC to reverse the yuan's softer trend, but instead to manage the depreciation in an orderly manner. "It's more of a signal to control the pace of yuan depreciation," said a trader at a foreign bank.

Some market participants also said they expected the PBOC to raise FX risk reserves for some forwards contracts if the yuan continues to fall too rapidly. The onshore yuan has lost 2.8% against the dollar since mid-August, but has eased only slightly over that same period on a trade-weighted basis. The CFETS index, a gauge of the yuan's strength against the currencies of its major trading partners, fell 0.08% over the past three weeks and last stood at 101.96 on Tuesday. Ting Lu, chief China economist at Nomura, said the PBOC's recent policy actions showed that it cared specifically about the yuan-dollar exchange rate. "In a year of the once-in-a-decade leadership reshuffle and with elevated U.S.-China tensions, Chinese leaders especially care about RMB's bilateral exchange rate with USD because they believe RMB/USD somehow reflects relative economic and political strength," Lu said.

Nomura sees further downside in the yuan, and expects it to trade at 7.2 per dollar at the end of 2022. The yuan market at 0400 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.9096 6.8998 -0.14% Spot yuan 6.9396 6.933 -0.10% Divergence from 0.43% midpoint* Spot change YTD -8.42% Spot change since 2005 19.26% revaluation Key indexes: Item Current Previous Change Thomson 0.0 Reuters/HKEX CNH index Dollar index 109.642 109.826 -0.2 *Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint.

The People's Bank of China (PBOC) allows the exchange rate to rise or fall 2 percent from official midpoint rate it sets each morning. OFFSHORE CNH MARKET Instrument Current Difference from onshore Offshore spot yuan 6.951 -0.16% * Offshore 6.8692 0.59% non-deliverable forwards ** *Premium for offshore spot over onshore **Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. . (Reporting by the Shanghai Newsroom; Editing by Ana Nicolaci da Costa and Jacqueline Wong)