Yuan extends rally, set for best day since June

(Updates prices, adds comments and details)

SHANGHAI, Jan 7 (Reuters) - China’s yuan extended its rally on Tuesday and is set for its best session in more than six months, supported by corporate dollar selling and a return of risk appetite as markets decided worries about a U.S.-Iran confrontation were overblown.

At the end of domestic trading, onshore spot yuan finished at 6.9376 per dollar at 0830 GMT, 392 pips stronger than the previous late session close of 6.9768.

If the yuan retains the gains at the late night close, it will have gained 0.57% for the day. That would be its biggest daily rise since June 20.

Safe-haven assets retreated from their highs on Tuesday morning, and the moves benefited the Chinese yuan and other Asian currencies.

A risk-off mood “lasted for about a day, and now people have realised that, perhaps, the most important thing is that global interest rates are low, and that’s always going to be a pro-risk factor,” said Stuart Oakley, global head of flow FX at Nomura in Singapore. The Taiwan dollar and Indonesian rupiah also rose climbed today, he pointed out.

Before the market opened on Tuesday, the People’s Bank of China (PBOC) set its midpoint rate at 6.969 per dollar, up 0.04% from the previous fix of 6.9718.

Traders also attributed yuan’s advance in the afternoon session to corporate dollar selling. Chinese companies usually convert dollars to the local currency before the Lunar New Year, which falls on Jan. 25 this year, to make various payments.

A trader at foreign bank said many institutions who held long dollar positions at around 6.95 per dollar were forced to liquidate to stop loss and follow the trend when the spot price rose past the key threshold.

Multiple traders said major state-owned banks were selling dollars in the spot market, but none of them believed that was an official attempt to counteract yuan weakness. Dollar selling from both corporate clients and banks lifted the yuan across its 200-day moving average in the afternoon.

A second trader at a Chinese bank pointed out the strength in the yuan was also a result of huge amounts of capital inflows through equity investment.

Official data showed that the northbound flows via the Stock Connect linking Hong Kong and mainland amounted to about 24.5 billion yuan so far this month.

Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said spikes in longer-dated offshore yuan forward rates suggested investors might be acquiring the Chinese currency to invest in yuan-denominated assets.

“The less bearish RMB prospect on China-U.S. Phase 1 deal and favourable yield differential (between Chinese government bonds and U.S. Treasuries) made the RMB assets investment appealing,” Cheung said in a note.

One-year offshore dollar/yuan swap points have steadily risen since the start of the new year. Onshore swaps for the same tenor hovered at the highest level since June 2018.

Several onshore yuan traders said many major state banks were seen swapping dollars for yuan since the start of the new year as many corporate clients usually have higher hedging demand.

Latest data published on Tuesday afternoon showed that China’s foreign exchange reserves rose more than expected in December as the yuan rebounded after Washington and Beijing reached a partial trade deal.

Reporting by Winni Zhou, Liu Luoyan and Andrew Galbarith in Shanghai, Tom Westbrook in Singapore; editing by Sam Holmes, Larry King