(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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