June 2, 2017 / 4:48 AM / 9 months ago

China's yuan retreats from 7-month high, tight offshore liquidity eases

 (Updates prices; adds quotes, details and table)
    By Winni Zhou and John Ruwitch
    SHANGHAI, June 2 (Reuters) - China's yuan pulled back from
near seven-month highs against the U.S. dollar on Friday, after
liquidity tightness eased slightly in Hong Kong and the
greenback gained in global markets.    
    The People's Bank of China set the midpoint rate
at 6.8070 per dollar prior to market open, firmer than the
previous fix of 6.8090. Friday's official guidance via the daily
midpoint was the strongest since Nov. 10.
    Tightened yuan liquidity in Hong Kong had pushed the
offshore yuan spot rate to a high of 6.7245 per dollar on
Thursday, the strongest since October last year. 
    But offshore yuan gave up gains on Friday as liquidity
stress appeared to ease up and the spot rate weakened to a low
of 6.7943 per dollar before trading at 6.7929 by midday.
    Hong Kong's overnight yuan borrowing rate fell
sharply from a near five-month high.
    The CNH Hong Kong Interbank Offered Rate benchmark (CNH
Hibor), set by the city's Treasury Markets Association, fell to
8.67550 percent for overnight contracts, more than 34 percentage
points lower than the previous fix of 42.81500 percent, which
was the highest since Jan. 6.
    The Hong Kong Monetary Authority (HKMA), replying to Reuters
in an emailed statement, said the interbank market on the whole
was operating in an orderly manner after it noted tightness in
CNH liquidity and provided liquidity support to banks.
    OCBC Bank said in a note that it expected "CNH will continue
to be a liquidity play in the near term".
    Losses in offshore yuan also dragged down its onshore
    In the onshore spot market, the yuan opened at
6.8035 per dollar, tested a low of 6.8193 before trading at
6.8142 at midday, 80 pips weaker than the previous late session
close and 0.11 percent softer than the midpoint. 
    For the week, onshore yuan is on course to gain 0.6 percent
against the U.S. dollar, the biggest weekly rise since July
    Traders said dollar demand picked up on Friday, but they had
not witnessed major state-owned banks selling the greenback to
prop up the Chinese currency as they had seen on Thursday.
    Many market participants believed dollar selling by the
biggest state banks in recent weeks had been a key part of
government efforts to support the exchange rate.
    After months of holding the yuan relatively stable against
the dollar, China has suddenly allowed the currency to advance
sharply since May 24, when Moody's Investors Service downgraded
its sovereign credit rating for the first time since 1989.
    Li Liuyang, senior FX analyst at China Merchants Bank in
Shanghai said the yuan "was catching up and reacting to the
dollar movement overseas" after having traded steadily over the
past two months.
    Li added that the yuan would be tracking the global dollar
index more closely in the near term.
    The global dollar index, a gauge that measures the dollar
strength against six other currencies, rose to 97.22 from the
previous close of 97.198 on Friday after upbeat U.S. private
sector job figures.
    Christy Tan, head of Markets Strategy/Research, Asia at
National Australia Bank said the yuan's surge over the past few
trading sessions did not represent a meaningful departure from
the way the PBOC managed its currency.
    "It is probably premature to call the last 2 days' moves a
change in the FX regime," Tan said.
    It is also unclear whether the yuan's gains against the
dollar has stalled for now, with market views for a U.S. rate
hike firming due to upbeat U.S. economic data.
    Stephen Innes, senior trader at OANDA said the aggressive
yuan bears will "either go into hibernation or take to the
sidelines licking their wounds for the foreseeable future".
    Separately, the central bank-owned Financial News said on
Friday the adjustment to the mechanism the PBOC uses to set the
daily yuan midpoint was a pre-emptive move to offset the effects
from expectations of a U.S. interest rate increase this month
and the stresses of seasonal dollar demand.
    The China Foreign Exchange Trade System (CFETS) trading
platform, overseen by the central bank, said last Friday that a
"counter-cyclical factor" would be introduced into the way it
calculates the yuan's reference rate each day, allowing it to
better reflect supply and demand.

    The yuan market at 0409 GMT: 
 Item               Current  Previous  Change
 PBOC midpoint      6.807    6.809     0.03%
 Spot yuan          6.8142   6.8062    -0.12%
 Divergence from    0.11%              
 Spot change YTD                       1.94%
 Spot change since 2005                21.46%
    Key indexes:
 Item            Current     Previous  Change
 Thomson         94.59       94.9      -0.3
 CNH index                             
 Dollar index    97.22       97.198    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 percent from official midpoint rate it sets each

 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.7929    0.31%
 Offshore              6.9869    -2.57%
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint,
since non-deliverable forwards are settled against the midpoint.

 (Editing by Jacqueline Wong)
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