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Yuan extends gains to 27-month high on PBOC guidance, upbeat data

 (Updates midday prices, adds table and comments)
    SHANGHAI, Oct 21 (Reuters) - The yuan advanced further to a
more than 27-month high against the dollar on Wednesday, led by
firmer central bank guidance and recent data showing a sustained
recovery in the world's second-largest economy.
    Prior to market opening, the People's Bank of China (PBOC)
set the midpoint rate at 6.6781 per dollar, 149 pips
or 0.22% firmer than the previous fix of 6.6930 and the
strongest guidance since July 16, 2018.
    Traders and analysts said Wednesday's stronger official
fixing largely matched market projections and drove the spot
market higher.
    The onshore yuan opened at 6.6699 per dollar and
was changing hands at 6.6549 at midday, its strongest since July
13, 2018, and 221 pips firmer than the previous late session
close.
    "The yuan continues to strengthen due to its superior
economic backdrop relative to other currency trades," Stephen
Innes, chief global markets strategist at Axi, said in a note.
    "The better retail sales data for September continues to
resonate and signals that domestic demand is holding up."
    Official data released this week showed China's economic
recovery accelerated in the third quarter as consumers shook off
their coronavirus caution.
    Ming Ming, chief analyst at Citic Securities attributed
recent yuan strength to changes in Sino-U.S. relations, as
differences between economic fundamentals, a softer dollar and
disturbances from the U.S. presidential election all supported
the yuan.
    A trader at a foreign bank said the yuan could march towards
6.6 per dollar level in the near term if authorities do not step
in. Several currency traders also noted how far the yuan could
strengthen largely depended on the central bank's stance.
    "Yuan appreciation could have a contractionary effect on the
economy, the central bank apparently does not want to see too
rapid a rise in the exchange rate," said Xie Yaxuan, chief macro
analyst at China Merchants Securities.
    "Although the central bank avoids direct participation in
the FX market, it can still affect supply and demand of yuan and
dollars through market-based methods."
    Earlier this month, the PBOC cancelled foreign exchange
forward reserve requirements, seen widely as a sign that
authorities were uncomfortable with the yuan's rapid gains.

    A second trader at a Chinese bank said he received rising
number of client queries to trim dollar positions, while those
who wanted dollars were holding back.
    The offshore yuan was trading at 6.6436 per dollar
by midday, its lofitest level since July 10, 2018. 
    
    The yuan market at 0400 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.6781   6.693     0.22%
                                       
 Spot yuan          6.6549   6.677     0.33%
                                       
 Divergence from    -0.35%             
 midpoint*                             
 Spot change YTD                       4.63%
 Spot change since 2005                24.37%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         95.49       95.47     0.0
 Reuters/HKEX                          
 CNH index                             
 Dollar index    92.904      93.046    -0.2
 
    
    
*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    6.6436    0.17%
        *                        
 Offshore              6.8125    -1.97%
 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; Editing by Sam
Holmes & Simon Cameron-Moore)
  
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