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China's yuan eases on rising dollar demand and weaker fixing

SHANGHAI, July 20 (Reuters) - China's yuan weakened against the U.S. dollar on Thursday, which traders attributed to rising demand for the greenback from companies. Prior to market opening, the People's Bank of China set the midpoint rate at 6.7464 per dollar, near Wednesday's nine-month high guidance of 6.7451. In the spot market, the yuan opened at 6.7580 per dollar and was changing hands at 6.7639 at midday, 113 pips weaker than the previous late session close and 0.26 percent softer than the midpoint. Traders said companies continued to take advantage of the weaker U.S. currency by building up dollar positions, as in the past few sessions. Dollar buying may persist for several days, they said. Oil firms usually build up their dollar reserves at 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. One onshore trader at a Chinese bank in Shanghai said the weakness in the offshore yuan dragged the onshore spot down further. "Some overseas market players were covering their short positions in the U.S. unit after signs showed that the dollar index may start to bottom out. And the losses in the offshore affected the onshore," said the trader. The global dollar index, a gauge that measures the dollar strength against six other currencies, rose to 94.927 at midday from the previous close of 94.779. It touched a more than 10-month low of 94.476 on Tuesday. The offshore yuan was traded 6 pips weaker than its onshore counterpart at 6.7645 per dollar as of midday. Multiple traders said authorities may have slightly loosened their grip on the currency recently as they had not seen major state-owned banks dumping dollars to prop up the yuan on Thursday. State banks often started offering dollar liquidity in the onshore market when the onshore spot traded 100 pips weaker than the same day's fixing. Such activity has been seen by traders as part of official efforts to keep the yuan from sinking. On Thursday, China's foreign exchange regulator said commercial banks sold a net $20.9 billion of foreign exchange in June, down from a net sale of $17.1 billion in May. The State Administration of Foreign Exchange added that cross-border capital flows stabilised in the first half of 2017, with foreign exchange supply and demand in the market little changed. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 93.96, weaker than the previous day's 94.11. 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 6.9025, or 2.26 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0354 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.7464 6.7451 -0.02% Spot yuan 6.7639 6.7526 -0.17% Divergence from 0.26%

midpoint*

Spot change YTD 2.70% Spot change since 2005 22.36%

revaluation

Key indexes:

Item Current Previous Change Thomson 93.96 94.11 -0.2

Reuters/HKEX CNH index

Dollar index 94.927 94.779 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 6.7645 -0.01% * Offshore 6.9025 -2.26%

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 Borsuk)