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China's yuan firms as traders trim bearish bets, corporate dollar demand softens

softens@

SHANGHAI, July 6 (Reuters) - China's yuan firmed against the U.S. dollar on Thursday as market participants switched to long positions following moves by state-owned banks earlier this week to support the Chinese currency, and as corporate dollar demand softened. The People's Bank of China (PBOC) set the yuan midpoint weaker on Thursday to 6.7953 per dollar prior to the market opening, the softest level in a week and softer than the previous fix at 6.7922. In the spot market, the yuan opened at 6.7985 per dollar and was changing hands at 6.8021 at midday, 11 pips stronger than the previous late session close but 0.10 percent weaker than the midpoint. "The market was relatively balanced today. Corporate dollar demand was not excessive ... while some market participants increased their long yuan positions," said a trader at a Chinese bank in Shanghai. Several traders have said Chinese banks sold dollars against onshore yuan in the swap market in long-end this week. The operations allow banks to obtain the U.S. unit in short-end, and sell it in the spot market to support the Chinese currency. Market participants have taken this as a cue not to make bearish bets against the yuan during June and July, which are months of typically high corporate dollar demand as companies purchase the greenback to pay dividends to their shareholders overseas. Over the past two months, state-owned banks have sold dollars in the onshore spot market to prevent the yuan from sinking in what traders believe is part of an official effort to stabilise the yuan and flush out overly bearish yuan positions. However, several traders said they had not seen any such selling in the onshore spot market on Thursday. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.58, firmer than the previous day's 94.57. The global dollar index fell to 96.26 from the previous close of 96.29. The offshore yuan was trading 0.02 percent firmer than the onshore spot at 6.8009 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 6.9605, 2.37 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0419 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.7953 6.7922 -0.05% Spot yuan 6.8021 6.8032 0.02% Divergence from 0.10%

midpoint*

Spot change YTD 2.13% Spot change since 2005 21.68%

revaluation

Key indexes:

Item Current Previous Change Thomson 94.58 94.57 0.0

Reuters/HKEX CNH index

Dollar index 96.26 96.29 0.0

*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 6.8009 0.02% * Offshore 6.9605 -2.37%

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 Sam Holmes)