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China's yuan hits another record, then slips as caution emerges ahead of resistance

Lu Jianxin and Kazunori Takada
Friday, 25 Oct 2013 | 12:58 AM ET

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* Yuan hits record high for third day in early trade

* Sentiment turns cautious ahead of 6.08/dollar resistance

* Anticipation of quick end of this round of yuan rise

* Central bank attitude crucial for yuan performance

* Yuan still has room to rise longer term, but limit seen at 6.00 by end-2013

SHANGHAI, Oct 25 (Reuters) - China's yuan hit a record high for the third consecutive day on Friday but quickly pared gains as market sentiment turned cautious as the currency neared a key resistance level, traders said. Spot yuan traded as high as 6.0802 per dollar in early trade, its highest since China established the domestic foreign exchange market in 1994, before retreating to 6.0823 near midday, slightly weaker than Thursday's close of 6.0820. Before trading began, the People's Bank of China (PBOC) set the official midpoint rate at 6.1333, two pips stronger than Thursday and within arm's reach of the midpoint's record high of 6.1330 fixed on Wednesday. "Trading turned cautious when the yuan approached the 6.08/dollar resistance" said a trader at a Chinese commercial bank in Shanghai. "Market players believe the yuan's latest round of appreciation may end soon unless the PBOC pushes for a further currency rise." The yuan has risen 0.63 percent since Oct. 11, breaching four psychological barriers at 6.12, 6.11, 6.10 and 6.09 as the central bank, making use of dollar weakening in global markets, guided the Chinese currency into a fresh round of appreciation, traders said. The PBOC's tolerance towards the recent yuan's rise is seen partly due to the delay of long-anticipated tapering of U.S. quantitative easing (QE), which will put off an expected slowdown of capital inflows into China, traders said. There is also market speculation that the latest wave of yuan appreciation is related to the upcoming currency report by the U.S. Treasury Department. The report was due for publication on Oct. 15 but was delayed by the partial closure of the U.S. government earlier this month. Adding to the bullish sentiment toward the yuan, China has witnessed a slew of better-than-expected data. A preliminary survey showed on Thursday that strong new orders helped China's manufacturing sector record its fastest expansion in October for seven months. While expecting the yuan to consolidate in the near term, traders said the yuan still has potential to appreciate in the medium-term as China still sees net capital inflows into the country, keeping dollar supply in the domestic market abundant. The yuan is likely to see a fresh round of appreciation in late 2013, testing major psychological resistance at 6.0 per dollar but may stop short of effectively breaking through that level before year end, traders said. Long positions in the yuan hit a five-month high in the last two weeks as investors grew more bullish on most emerging Asian currencies on growing views that the U.S. Federal Reserve will keep its stimulus in place longer, a Reuters poll showed on Thursday.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1333 6.1335 0.00 Spot yuan 6.0823 6.0820 0.00

Divergence from midpoint* -0.83 (pct)

Spot change ytd +2.43 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 6.0759 +0.11* Offshore non-deliverable 6.1492 -0.26**

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 Kim Coghill)