SHANGHAI, Nov 20 (Reuters) - The yuan rebounded on Friday after China kept its policy rate steady for the seventh month in a row to reflect improving economic fundamentals, but gains in the local unit were capped as the dollar halted its slide in global markets. China left its benchmark lending rate for corporate and household loans unchanged for a seventh straight month at its November fixing on Friday, matching market expectations. Traders said the rate decision reflected the central bank's commitment to a hawkish policy stance despite recent bond market defaults that had spurred speculation it could ease its grip. They said the persistent yield gap between China and other major global economies is expected to continue to attract foreign capital inflows and support the yuan. The onshore yuan opened at 6.5751 per dollar and was changing hands at 6.5778 at midday, 55 pips stronger than the previous late session close. While most countries expect more monetary easing to counteract the coronavirus disruption, some traders and economists expect China's next move will be an interest rate hike. "With growth now back to its pre-virus path and attention turning to financial risks, we think the next move in the loan prime rate (LPR) will be an increase early next year," Julian Evans-Pritchard, senior China economist at Capital Economics said in a note. Sylvia Sheng, global multi-asset strategist at J.P. Morgan Asset Management in Hong Kong, sees some upside room for the yuan over the next six to 12 months, underpinned by China's strong exports and continued capital inflows. "If developed economies continue to recover from virus disruptions, they will be supportive of China's exports and benefit the yuan," she said. U.S. interest rates are unlikely to rise too much as the COVID-19 situation worsens, and fiscal stimulus remains uncertain, she said. "The Federal Reserve may need more quantitative easing, which will limit the upside room for interest rates. (China's) yield advantage will still be attractive to global investors," Sheng said. Some currency traders said the market has largely shaped a consensus that the yuan could rise further, while attributing the currency's retreat in the previous two sessions to seasonal corporate dollar demand. Gains in the yuan on Friday morning were limited by a steady dollar after U.S. Treasury Secretary Steven Mnuchin called for an end to coronavirus pandemic relief for struggling businesses. In a letter to U.S. Federal Reserve Chair Jerome Powell, Mnuchin said the $455 billion allocated to Treasury under the CARES Act should be instead available for Congress to reallocate. Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.5786 per dollar, weaker than the previous fix of 6.5484. The yuan market at 0400 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.5786 6.5484 -0.46% Spot yuan 6.5778 6.5833 0.08% Divergence from -0.01% midpoint* Spot change YTD 5.86% Spot change since 2005 25.82% revaluation Key indexes: Item Current Previous Change Thomson 95.77 95.86 -0.1 Reuters/HKEX CNH index Dollar index 92.295 92.375 -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 6.5715 0.10% * Offshore 6.744 -2.45% 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 Andrew Galbraith)
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