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China's yuan strengthens, nears 6.6 level last seen in June 2016

SHANGHAI, Aug 29 (Reuters) - China's yuan strengthened against the U.S. dollar in both onshore and offshore markets on Tuesday morning, relative to the day's guidance and Monday's local official close, aided by the greenback's broad weakness. The midday level, while more than 200 pips stronger than the 4:30 pm Monday official close of trading, was slightly weaker than the late night close. The onshore yuan has gained 1.8 percent against the dollar in August, and is on course for its best month since July 2005 when the yuan was revalued and taken off a fixed dollar peg. Some market watchers said much of the yuan's gain since the start of the second quarter is due to the weaker dollar and to Beijing's tighter capital controls, rather than economic fundamentals. Prior to market opening on Tuesday, the People's Bank of China set its midpoint rate at 6.6293 per dollar, again the strongest since Aug. 19, 2016. The level was 60 pips or 0.1 percent firmer than the previous fix. In the spot market, the onshore yuan opened at 6.6240 per dollar and was changing hands at 6.6087 at midday, 37 pips softer than the Monday late session close but 0.31 percent stronger than the midpoint. The offshore counterpart also strengthened on Tuesday morning and was 0.01 percent firmer than the onshore spot at 6.6083 per dollar. Traders expect the onshore spot yuan rate to soon breach the psychologically important 6.6 per dollar level, last reached in June 2016. "6.6 is the next resistance for the market," said a trader at a Chinese bank in Shanghai. Companies who hold large amounts of dollars were seeking to liquidate positions to reduce exchange losses. And such dollar sales would give the yuan additional support. Some market participants said the risk of further declines in the U.S. unit still remained. North Korea fired a missile early on Tuesday that flew over Japan, in a sharp escalation of tensions on the Korean peninsula. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.06, firmer than the previous day's 94.78. The global dollar index rose to 92.234 from the previous close of 92.207. 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 6.7555, or 1.87 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0347 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.6293 6.6353 0.09% Spot yuan 6.6087 6.605 -0.06% Divergence from -0.31%

midpoint*

Spot change YTD 5.11% Spot change since 2005 25.24%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.06 94.78 0.3

Reuters/HKEX CNH index

Dollar index 92.234 92.207 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 6.6083 0.01% * Offshore 6.7555 -1.87%

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 John Ruwitch; Editing by Richard Borsuk)