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China's yuan strikes record high, factory survey helps sentiment

Lu Jianxin and Pete Sweeney
Thursday, 24 Oct 2013 | 12:49 AM ET

* Yuan hits record despite slightly weaker PBOC midpoint

* Hopes that PBOC may guide yuan to appreciate further

* HSBC China manufacturing PMI in Oct adds bullishness

* But yuan may peak at about 6.0/dollar in 2013 - traders

SHANGHAI, Oct 24 (Reuters) - China's yuan hit a record high versus the dollar on Thursday for the second straight day as hopes that the central bank may guide the yuan to appreciate further offset a slightly weaker official midpoint, traders said. Adding to the bullish sentiment toward the Chinese currency, a preliminary survey showed on Thursday that strong new orders helped China's manufacturing sector record its fastest expansion in October for seven months, providing more evidence that the world's second-largest economy is stabilising. The flash Markit/HSBC Purchasing Managers Index (PMI) stood at 50.9 in October, above September's final reading of 50.2 and marking a seven-month high. Spot yuan traded as high as 6.0815 per dollar. It retreated slightly to 6.0819 near midday, still up 0.03 percent from Wednesday's close of 6.0835. The People's Bank of China (PBOC) set the official midpoint rate at 6.1335 on Thursday, off Wednesday's record high of 6.1330. "The five-pip weaker midpoint on Thursday will not curb optimism regarding yuan appreciation created by a slew of record high midpoints recently," said a trader at an Asian bank in Shanghai. "The market expects the PBOC to remain tolerant of yuan appreciation in the near term." Traders said the yuan's recent strength was still mainly driven by Chinese corporates steadily unloading dollars. Dollar sales appeared to have lost some momentum this week after the yuan hit a slew of all-time highs since the start of last week, indicating growing caution in trading. Traders said they expected the yuan's appreciation to stop around the psychological barrier of 6.0 per dollar, and said they believed it was unlikely the currency would effectively break through the level before year end. They previously believed the yuan would not be able to pierce the 6.1 barrier, but that line was crossed on Oct. 16.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1335 6.1330 -0.01 Spot yuan 6.0819 6.0835 +0.03

Divergence from midpoint* -0.84 (pct)

Spot change ytd +2.44 Spot change since 2005 revaluation +36.08

*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 the official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

The offshore yuan market at a glance:

Instrument Current Difference from onshore

(pct)

Offshore spot yuan 6.0813 +0.01* Offshore non-deliverable 6.1490 -0.25**

forwards

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

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RECENT DEVELOPMENTS - ANALYSIS-Rally in tightly managed yuan shows China leery of FX reform - CHINA MONEY - PBOC preparing market for more yuan volatility - ANALYSIS-Bullish yuan herd leaves China fundamentals in the dust. - CHINA MONEY - Currency war or no, Beijing doesn't want Asia to take stable.

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 July show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money outflows reach record high in July 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 Simon Cameron-Moore)