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China's yuan weakens as dollar demand offsets strongest fix in 9 months

SHANGHAI, July 19 (Reuters) - China's yuan weakened against the dollar for the first time in eight days on Wednesday, despite the strongest official fixing in almost nine months as businesses picked up dollars on the cheap following the U.S. currency's recent downturn. Prior to market opening, the People's Bank of China set the yuan midpoint at 6.7451 per dollar, its strongest level since Oct.20 2016, reflecting the greenback's broad decline amid signs the Federal Reserve will go slow on its rate tightening cycle. Wednesday's official guidance was 160 pips, or 0.24 percent, firmer than the previous session's fix at 6.7611 per dollar. The yuan has been bid up since the second quarter of this year after Chinese authorities stepped up support for the currency in the face of entrenched bearish bets following its sharp decline in 2016. The yuan has risen 2.8 percent against the dollar so far this year, after a 6.5 percent slide last year. Wednesday's strong fixing, however, failed to guide the spot yuan higher as some companies took advantage of the cheaper U.S. currency by building up their dollar positions, traders said. Oil firms usually build up their dollar reserves mid-month for their business needs, while other companies face rising dollar requirements for trade and finance purposes when the month-end approaches. The dollar buying has picked up with the U.S. currency's slide over the past two weeks or so. The spot yuan opened at 6.7464 per dollar and was changing hands at 6.7568 at midday, 90 pips weaker than the previous late session close and 0.17 percent weaker than the midpoint. A trader at a Chinese bank in Shanghai said the market "has not shown interest in testing highs or lows in the yuan." Major state-owned banks, who have usually dumped dollars to prop up the yuan when the onshore spot traded 100 pips weaker than the same day's fixing, did not show up on Wednesday morning, several traders said. One dealer at a Chinese bank said the authorities may have slightly loosened their grip on the currency given the stabilisation of the yuan over recent months. On the whole, markets were also watching out for the policy meeting of the European Central Bank on Thursday. Investors were wary of making any big moves in case the ECB proved less hawkish than bulls were betting on. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.11, weaker than the previous day's 94.14. The global dollar index rose to 94.75 from the previous close of 94.604. The offshore yuan was trading 0.04 percent firmer than the onshore spot at 6.7540 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 6.883, 2.00 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0357 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.7451 6.7611 0.24% Spot yuan 6.7568 6.7478 -0.13% Divergence from 0.17%

midpoint*

Spot change YTD 2.81% Spot change since 2005 22.49%

revaluation

Key indexes:

Item Current Previous Change Thomson 94.11 94.14 0.0

Reuters/HKEX CNH index

Dollar index 94.75 94.604 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 6.754 0.04% * Offshore 6.883 -2.00%

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)