Yuan little changed as cabinet signals pause in appreciation trend
* Yuan stable amid uncertain economic outlook
* State Council promises to keep yuan steady
* C.bank seen preventing big moves in either direction
* Recent reforms may signal wider trading band is near
SHANGHAI, July 25 (Reuters) - The Chinese yuan traded narrowly on Thursday after China's cabinet signaled it would prevent significant currency appreciation while the economy shows signs of weakness. The State Council on Wednesday announced a series of measures to stabilise economic growth and also pledged to "maintain the renminbi exchange rate basically stable at a reasonable equilibrium level." Analysts interpreted the statement as a sign that following big gains in April and May, the government will not allow further yuan appreciation as foreign demand for Chinese exports was weak and the domestic economy was also slowing. But they believed the authorities would also prevent major depreciation, which might otherwise occur if capital outflows -- which have increased recently -- further intensify. dollar, slightly weaker than Wednesday's close of 6.1360. Even as recent data paints a weak outlook for the Chinese economy, authorities have pushed ahead with economic reforms including liberalising lending rates and expanding investment quotas into the onshore markets. Market watchers believe the larger quotas may be setting the stage for the next phase of economic reforms which may include widening the yuan's daily trading band. The dollar/yuan exchange rate is allowed to fluctuate 1 percent on either side of the fixing, and the last time the band was widened was in April 2012. Some like Credit Agricole expect the band to be widened to 1.5 percent as soon as next week, but it may not be accompanied "We believe that the CNY will weaken after band widening. This is because more flexibility implies a higher risk of holding any currency positions, with many in the market still likely long," the bank's analysts said in a daily note. On Thursday, the PBOC fixed the daily yuan at its weakest level so far this week at 6.1759, breaking a three-day streak of strong fixes. In the currency forwards market, one-month and one-year rates were relatively flat after edging higher earlier this week with little flows seen from exporters. "Flow-wise we see little selling interest from companies as spot held in a tight range but some offers might come back on dollar/yuan if we manage to rise above 6.14 again," said a trader at a European Bank in Hong Kong.
The onshore spot yuan market at a glance:
Item Current Previous Change (pct) PBOC midpoint 6.1759 6.1695 -0.10 Spot yuan 6.1379 6.136 -0.03
Divergence from midpoint* -0.62 (pct)
Spot change ytd 1.51 Spot change since 2005 revaluation 34.84
*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 1 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
The offshore yuan market at a glance:
Instrument Current Difference from onshore
Offshore spot yuan 6.1380 0.00* Offshore non-deliverable 6.2745 -1.57**
*Premium for offshore spot over onshore
**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> RECENT DEVELOPMENTS - Yuan rally starts to fade as capital inflows to China slow
- ANALYSIS-Bullish yuan herd leaves China fundamentals in the dust - Currency war or no, Beijing doesn't want Asia to take stable yuan for granted - China opens new front in money war as yuan speculation distorts export data
KEY DATA POINTS - Gap between PBOC midpoint and spot rate is narrowing. GRAPHIC: http://link.reuters.com/qyx74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX purchases in May show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money inflows turn to outflows in May GRAPHIC: http://link.reuters.com/saz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t
(Editing by Jacqueline Wong)