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Yuan edges up but set for weekly loss on views PBOC looking to slow gains

SHANGHAI, Sept 15 (Reuters) - China's yuan inched up slightly against the U.S. dollar on Friday, but looked set for its biggest weekly loss since November as speculation swirls over whether the central bank is looking to slow its rapid gains. The yuan was among the top emerging market currency performers last month, and had recorded a year-to-date gain of more than 7.5 percent at one point last week, more than recouping hefty losses suffered last year. But the rally has paused in recent sessions, after the People's Bank of China (PBOC) relaxed some measures on yuan trading in forwards markets and started setting weaker daily guidance rates after a string of firmer midpoints. It has now backpedaled 0.9 percent against the greenback so far this week. "While we do not think that the PBOC is targeting or protecting any particular level for the exchange rate, the move signals discomfort with what had become an increasingly one-way market," said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman. Prior to the market opening on Friday, the People's Bank of China (PBOC) lifted its official yuan midpoint slightly to 6.5423 per dollar, after setting it at the weakest level in nearly two weeks on Thursday. The midpoint was 42 pips or 0.06 percent stronger than Thursday's fix of 6.5465. The strength in the yuan midpoint reflected dollar weakness, which lost ground against a basket of major currencies overnight despite data that showed a faster-than-forecast increase in the U.S. consumer prices. The greenback was dragged lower in early Asian trade on Friday after North Korea fired a missile that flew over Japan's northern Hokkaido far out into the Pacific Ocean.

In the spot market, the yuan opened at 6.5450 per dollar and was changing hands at 6.5495 at midday, 45 pips firmer than from the previous late session close but 0.11 percent softer than the midpoint. If the spot yuan finishes the late night session at the current level, the yuan would post its biggest weekly loss in percentage terms since November 2016. Although the guidance rate was higher, gains in the yuan was capped by heavy corporate dollar buying on Friday, traders said, pointing to a weaker midday spot rate compared with same day's fixing. 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. Market participants were also building up long dollar positions for their proprietary trade on Friday as they believed that the dollar might have hit a bottom in the near term, said a dealer at a Chinese bank in Shanghai. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.89, weaker than the previous day's 95.96. The global dollar index rose to 92.135 from the previous close of 92.124. The offshore yuan was trading 0.01 percent weaker than the onshore spot at 6.5501 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 6.669, 1.90 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0406 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.5423 6.5465 0.06% Spot yuan 6.5495 6.554 0.07% Divergence from 0.11%

midpoint*

Spot change YTD 6.06% Spot change since 2005 26.37%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.89 95.96 -0.1

Reuters/HKEX CNH index

Dollar index 92.135 92.124 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 6.5501 -0.01% * Offshore 6.669 -1.90%

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 Kim Coghill)