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Yuan firms, but uncertainty rises ahead of U.S. election

    SHANGHAI, Oct 29 (Reuters) - China's yuan firmed on
Thursday, walking back losses that had been driven by a tweak to
the currency's daily midpoint fixing methodology as the currency
reverted to what is widely viewed as a long-term strengthening
trend.
    But traders and analysts said the market remained cautious
given significant uncertainty over U.S. elections and a surge in
new global COVID-19 cases.
    The People's Bank of China set the midpoint rate
at 6.726 per dollar prior to market open, weaker than
Wednesday's fix of 6.7195. 
    Spot yuan opened at 6.7220 per dollar and
strengthened to 6.7111 at midday, 179 pips stronger than the
late session close Wednesday. Its offshore counterpart
strengthened to 6.7085 per dollar.
    The dollar took a pause on Thursday after rising on fears
that fresh lockdowns in Europe could hit a fragile economic
recovery.
    "The main risk is still the election. And the new lockdown
in Europe is also weighing on sentiment - you saw the dollar go
up," said a trader at a Chinese bank.
    "Regarding the election, some market participants have
already priced in a Biden victory and believe if Trump is
elected, that will be a black swan incident. It's getting more
complicated," he said.
    Reflecting the rising uncertainty around the Nov. 3
election, one-week offshore Chinese yuan volatility
traded as high as 12.038 on Thursday, its highest since August
2015.  
    "It's just less clear as to how the markets are going to
react. (The yuan) could have massive spikes in both directions,"
said Stephen Innes, chief global market strategist at Axi. 
    The yuan has strengthened nearly 7% from late-May lows,
lifted by China's firming economic recovery and steady inflows.
In a move interpreted as reflecting Beijing's desire for more
two-way volatility in the yuan's exchange rate, Chinese banks
have suspended the use of a counter-cyclical "X" factor in the
yuan's daily fixing formula.
    Some analysts say they see room for the yuan to continue its
march higher.
    Many investors buying Chinese bonds had adopted a carry
trade strategy with little hedging, boosting the impact of yuan
buying, said Ji Tianhe, head of FXLM strategy for global markets
China at BNP Paribas in Beijing.
    "Additionally, given Chinese exports remain strong,
appreciation in the yuan is more likely to happen due to their
sales of USD," he said.
    Ji said he sees the yuan strengthening to 6.5 per dollar by
the first quarter of 2021.
    

    The yuan market at 4:04AM GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.726    6.7195    -0.10%
                                       
 Spot yuan          6.7111   6.729     0.27%
                                       
 Divergence from    -0.22%             
 midpoint*                             
 Spot change YTD                       3.76%
 Spot change since 2005                23.33%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         94.77       94.58     0.2
 Reuters/HKEX                          
 CNH index                             
 Dollar index    93.383      93.432    -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% from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.7108    0.00%
        *                        
 Offshore              6.8793    -2.23%
 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 Andrew Galbraith and Winni Zhou; Editing by
Stephen Coates)
  
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