June 24, 2020 / 5:28 AM / 8 days ago

Yuan flirts with 2-month high before dollar demand kicks in

    SHANGHAI, June 24 (Reuters) - The yuan briefly rose to a
near two-month high against the dollar on Wednesday before
giving up all of its gains as companies rushed to load up on
cheaper dollars ahead of a long weekend.    
    Traders said sentiment stabilised after Larry Kudlow, the
top White House economic official, said on Tuesday that the U.S.
trade deal with China was not only fully intact, but Beijing has
actually stepped forward in a number of areas in a constructive
way.
    The comment further eased concerns over confusing comments
by White House adviser Peter Navarro over the fate of the trade
deal a day earlier.
    Prior to the market opening, the People's Bank of China
(PBOC) set the midpoint rate at 7.0555 per dollar,
116 pips or 0.16% firmer than the previous fix of 7.0671. 
    In the spot market, the onshore yuan opened at
7.0572 per dollar and jumped to a high of 7.0509, the strongest
since April 30.
    But it was changing hands at 7.0710 at midday, 135 pips or
0.2% weaker than the previous late close.
    Traders attributed the reversal to rising corporate dollar
demand for month-end and half year-end payments, along with some
demand for dividend payments.
    Chinese financial markets will be closed from Thursday for
the Dragon Boat Festival, with trading resuming on Monday.
    Separately, liquidity in the interbank market improved on
Wednesday after the central bank injected a total of 500 billion
yuan ($70.73 billion) so far this week via open market
operations.
    Some market participants continue to expect a further cut in
 banks' reserve requirement ratios (RRR) soon, after the cabinet
flagged such a move last week, though PBOC Governor Yi Gang has
said the authorities will need to consider withdrawing liquidity
support at some point.
    Hu Yifan, regional CIO and chief China economist at UBS
Global Wealth Management said she believes policy stimulus would
continue as long as the economy requires it.
    "We also believe monetary policy would remain a relatively
loosening stance," she said, expecting another 100 to 300 basis
points of reduction to RRR and 10 to 40 basis points cuts to
medium-term lending facility (MLF) rate in the rest of the year.
    The latest private China Beige Book survey suggested China's
economy returned to growth, though barely, in the second quarter
after the first contraction on record in the first three months
of the year due to the coronavirus crisis.
    Analysts say weakness in China’s Emerging Industries PMI
(EPMI) could point to a loss of recovery momentum in June. The
China Sales Manager Headline Index (SMI) also suggested a
further fall in activity levels.    
    
    The yuan market at 0409 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      7.0555   7.0671    0.16%
                                       
 Spot yuan          7.071    7.0575    -0.19%
                                       
 Divergence from    0.22%              
 midpoint*                             
 Spot change YTD                       -1.52%
 Spot change since 2005                17.05%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         91.71       91.88     -0.2
 Reuters/HKEX                          
 CNH index                             
 Dollar index    96.651      96.635    0.0
 
    
    
*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    7.0642    0.10%
        *                        
 Offshore              7.1803    -1.74%
 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.
. 
    
($1 = 7.0690 Chinese yuan)
    

 (Reporting by Winni Zhou and Andrew Galbraith; Editing by Kim
Coghill)
  
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