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Yuan off 17-month high after PBOC lowers forward reserve requirements

 (Adds analysts' comments, swap points; updates prices)
    SHANGHAI, Oct 12 (Reuters) - The yuan retreated from a
17-month high on Monday after the central bank cut foreign
exchange forward reserve requirements, but losses were contained
as some corporate clients took advantage of the yuan weakness to
trim their dollar positions.
    Over the weekend, the People's Bank of China (PBOC)
announced it would lower to zero from 20% the reserve
requirement ratio for financial institutions when conducting
some foreign exchange forwards trading, with effect from Monday.

    The reduction, which effectively lowers the cost of shorting
the Chinese currency, came after a recent sharp rally in the
    "The relaxation likely signals the PBOC's discomfort of the
rapid appreciation of CNY recently," Goldman Sachs said in a
    The onshore spot yuan opened at 6.7268 per
dollar, and eased to a low of 6.7310 and was fetching 6.7204 at
midday, 272 pips weaker than the previous late session close.
The spot yuan posted its biggest one-day gain since 2005 on
    Its offshore counterpart weakened to a low of
6.7509 in early Asian trade before settling at 6.7165 per dollar
by midday.
    While market participants rushed to liquidate their long
yuan positions to stem losses, dragging the spot rate weaker,
some banks recommended to their corporate clients to take
advantage of the pullback in the yuan to sell their existing
dollars as they expected the yuan to resume its appreciation in
mid- to long-term.
    "The current situation is different from 2017, as economic
fundamentals, market sentiment and rate differentials (between
China and other major economies) all support a stronger yuan,"
said a trader at a Chinese bank. 2017 was the last time the PBOC
lowered the risk reserves requirements to zero before
re-introducing it in 2018.
    Some analysts said the PBOC had adjusted the risk reserve
requirements multiple times over the past few years to contain
strong one-way bets and rapid moves in the yuan.
    "While markets will take notice of this move by the PBOC, we
do not necessarily see it as a signal that they are
uncomfortable with the recent gains," said Khoon Goh, head of
Asia research at ANZ in Singapore.
    "The fixings this week will be more important in that
regard. If the fixings are consistently on the weaker side of
expectations that would be a sign that they would like a pause
to the yuan strength."
    On Monday, the PBOC set the midpoint rate at
6.7126 per dollar prior to market's open, the strongest since
April 23, 2019, but it was still much weaker than market
    Separately, the PBOC's risk reserve move also prompted
rising hedging demand from foreign investors and drove swap
points higher in forwards market. The one-year dollar/yuan swap
points hit 1,675 points on Monday morning, the
loftiest level since November 2017.

    The yuan market at 0400 GMT: 
 Item               Current  Previous  Change
 PBOC midpoint      6.7126   6.7796    1.00%
 Spot yuan          6.7204   6.6932    -0.40%
 Divergence from    0.12%              
 Spot change YTD                       3.61%
 Spot change since 2005                23.15%
    Key indexes:
 Item            Current     Previous  Change
 Thomson         94.62       95.03     -0.4
 CNH index                             
 Dollar index    93.088      93.113    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

 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.7165    0.06%
 Offshore              6.8778    -2.40%
*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 Andrew Galbraith
Editing by Shri Navaratnam and Muralikumar Anantharaman)