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China's yuan weakens, market shrugs off "Bond Connect"

SHANGHAI, July 3 (Reuters) - China's yuan weakened against the U.S. dollar after a softer official fixing on Monday, snapping the currency's 4-day winning streak, while the launch of a bond trading scheme between China and Hong Kong had little impact on the market. The "Bond Connect" programme between China and Hong Kong kicked off on Monday, linking China's $9 trillion bond market with overseas investors. But the launch had little immediate impact although some analysts said the programme would offer support for the Chinese currency in the long run. The People's Bank of China set the midpoint rate at 6.7772 per dollar prior to market open, weaker than the previous fix at 6.7744. Monday's fixing, the first weakening since last Wednesday, has been lifted by as much as 548 pips in the past three sessions. In the spot market, the yuan opened at 6.7760 per dollar and was changing hands at 6.7860 at midday, 44 pips weaker than the previous late session close and 0.13 percent softer than the midpoint. Spot yuan has strengthened 2.4 percent against the U.S. unit in the first half of this year, after losing around 6.5 percent in 2016. "Looking ahead, in the next six months, the RMB will largely depend on the strength of the US$," Larry Hu, analyst at Macquarie Capital wrote in a note on Monday. Traders said Monday's midpoint matched with their expectations, and stronger dollar purchases have dragged the spot yuan rate lower in morning trade. One trader from a Chinese bank in Shanghai noted that June was a traditional period for high corporate dollar demand, which could persist till July. Surges in the yuan last week has lifted the index for the yuan's value based on a trade-weighted basket to 93.29 from 93.22 a week earlier, the highest level since mid-March, according to official data from the China Foreign Exchange Trade System (CFETS). The CFETS publishes index figures on a weekly basis. China is due to release June foreign exchange reserves data this Friday, with market watchers expecting to see a fifth consecutive month of expansion. "FX reserves may be well supported in the next six to 12 months, as commercial banks have started to unload their net FX positions in exchange for RMB assets since March this year," Liu Wenqi, analyst at China International Capital Corporation said on Monday. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.45, flat against the previous day. The global dollar index rose to 95.781 from the previous close of 95.628. Offshore yuan was trading 0.08 percent firmer than the onshore spot at 6.7806 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 6.9485, 2.47 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0351 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.7772 6.7744 -0.04% Spot yuan 6.786 6.7816 -0.06% Divergence from 0.13%

midpoint*

Spot change YTD 2.37% Spot change since 2005 21.96%

revaluation

Key indexes:

Item Current Previous Change Thomson 94.45 94.45 0.0

Reuters/HKEX CNH index

Dollar index 95.781 95.628 0.2

*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.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.7806 0.08% * Offshore 6.9485 -2.47%

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 Jacqueline Wong)