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China's yuan strengthens again, hits strongest level since February
May 26, 2017 / 5:11 AM / 2 months ago

China's yuan strengthens again, hits strongest level since February

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 (Adds quotes, details and background)
    SHANGHAI, May 26 (Reuters) - China's yuan on Friday extended
the previous day's big gain, hitting its strongest level in more
than three months, and the Chinese currency was on track for its
best week since mid-January.
    At midday, spot yuan was trading at 6.8566, after
earlier reaching 6.8493, its firmest since Feb. 16.
    On Thursday, the day after Moody's Investors Service
downgraded China's sovereign rating, state banks sold dollars
and the yuan strengthened 0.3 percent for the day.
    Traders said on Thursday that Chinese authorities appeared
to be putting on a show to support the yuan in the wake of
Moody's downgrade.
    But speculation is also swirling that China may be adjusting
the way it calculates the yuan's daily midpoint rate to tamp
down volatility.
    China plans to change the way it calculates the yuan's daily
midpoint rate against the dollar, adding a "counter-cyclical
adjustment factor" that may blunt the impact of market swings,
Bloomberg reported on Friday.
    Prior to the market opening on Friday, the People's Bank of
China set the midpoint rate at 6.8698 per dollar,
weaker than the previous fix of 6.8695. 
    Friday's slightly weakened official guidance was still much
firmer than market expectations, a situation that has persisted
for weeks.
    At 6.8566 at midday, the onshore spot was 139 pips firmer
than the previous late session close and 0.19 percent stronger
than the midpoint.
    The sudden surge in the yuan showed that the Chinese
authorities might "attempt to give a warning to the RMB bears
who speculate on RMB depreciation following the downgrade on
China", Ken Cheung, Asian FX strategist at Mizuho Bank in Hong
Kong.
    In downgrading China for the first time in nearly 30 years,
Moody's said it expects the financial strength of the economy to
erode in coming years as growth slows and debt continues to
rise.
    Traders in the onshore market said there was some corporate
demand for the greenback in morning trade on Friday, but a much
stronger offshore counterpart curbed the onshore yuan from
sinking.
    The offshore yuan rose to 6.8360 per dollar, its
strongest intraday level since Feb.8, before retreating to
6.8426 as of midday. It was still traded 140 pips or 0.2 percent
firmer than the onshore spot.
    The strength in the offshore yuan was supported by signs of
short-term liquidity stress as seen in a rise in Hong Kong's
overnight yuan borrowing rate, which jumped to
7.75650 percent on Friday, the highest level since January.
    CNH Hibor, The CNH Hong Kong Interbank Offered
Rate benchmark, set by the city's Treasury Markets Association
(TMA), showed rates up across maturities. The one-week contract
surged to the highest level since Jan.23.
    The implied overnight deposit rate for the offshore yuan
 rose to 9.063 percent at one point in morning, the
highest since January 6.
    The global dollar index rose to 97.301 from the
previous close of 97.248. 
    Offshore one-year non-deliverable forwards contracts
(NDFs), considered the best available proxy for
forward-looking market expectations of the yuan's value, traded
at 7.0375, or 2.38 percent weaker than the midpoint.
    One-year NDFs are settled against the midpoint, not the spot
rate.
    
    The yuan market at 0410 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.8698   6.8695    0.00%
                                       
 Spot yuan          6.8566   6.8705    0.20%
                                       
 Divergence from    -0.19%             
 midpoint*                             
 Spot change YTD                       1.31%
 Spot change since 2005                20.71%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         93.83       93.39     0.5
 Reuters/HKEX                          
 CNH index                             
 Dollar index    97.301      97.248    0.1
 
    
    
*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    6.8426    0.20%
        *                        
 Offshore              7.0375    -2.38%
 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 Winni Zhou and John Ruwitch; Editing by Kim
Coghill)
  

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