China's yuan set for its best week since 2005, supported by a weaker dollar

SHANGHAI, June 30 (Reuters) - China's yuan firmed against the U.S. dollar for a fourth straight day on Friday due to broad-based weakness in the greenback, putting the Chinese currency on course for its best week since 2005. The People's Bank of China set the yuan midpoint at 6.7744 per dollar prior to market opening, its strongest level since Nov.7 2016. Friday's official guidance was 196 pips or 0.3 percent firmer than the previous day's fixing at 6.7940 per dollar. The strength in the guidance reflected weakness in the dollar, which languished near a nine-month low against a basket of currencies in the overseas market. The global dollar index, which measures dollar strength against six other currencies, stood at 95.511 as of 0314 GMT, after hitting a low of 95.470, the weakest level since October 2016. In the domestic spot market, the yuan opened at 6.7691 per dollar, jumped to 6.7551, then retreated to 6.7670 as of 0314 GMT, 181 pips stronger than the previous late session close and 0.11 percent firmer than the midpoint. For the week, the yuan was up around 1 percent against the dollar. If these gains are sustained by the close of trade, this week will be the yuan's best since July 2005, when China revalued its currency by 2.1 percent and de-pegged it from the U.S. dollar. The yuan is also on course to strengthen by 2.7 percent against the U.S. unit in the first half of this year, after shedding around 6.5 percent in 2016. Traders said they saw some major state-owned banks selling the U.S. dollar in the market on Friday, but added that it was not clear whether the banks were executing their clients' orders or were part of the official support to prop up the yuan. State banks have been regular dollar sellers since late last year in what traders believe is part of official efforts to prevent the yuan from weakening too fast. Better-than-expected manufactory data had little impact to the forex market, according to market participants. China's manufacturing sector expanded at the quickest pace in three months in June, buoyed by strong production and new orders, reassuring news for authorities trying to strike a balance between deleveraging and keeping the economy on an even keel. Separately, official data showed on Thursday that China recorded a surplus in its capital and financial account in the first quarter, indicating net capital inflows as policymakers tightened supervision of outflows. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.61, firmer than the previous day's 94.41. The offshore yuan was trading 0.08 percent firmer than the onshore spot at 6.7613 per dollar. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.938, 2.36 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0314 GMT:


Item Current Previous Change PBOC midpoint 6.7744 6.794 0.29% Spot yuan 6.767 6.7851 0.27% Divergence from -0.11%


Spot change YTD 2.66% Spot change since 2005 22.31%


Key indexes:

Item Current Previous Change Thomson 94.61 94.41 0.2

Reuters/HKEX CNH index

Dollar index 95.511 95.628 -0.1

*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 percent from official midpoint rate it sets each morning.


Instrument Current Difference

from onshore

Offshore spot yuan 6.7613 0.08% * Offshore 6.938 -2.36%

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 Richard Pullin)