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Yuan firms as corporates take profits on dollar ahead of Fed decision

SHANGHAI, Sept 20 (Reuters) - China's yuan firmed against the U.S. dollar on Wednesday as companies sold dollars to take profits on recent gains and square positions ahead of a Federal Reserve policy decision later in the session. The Fed is widely expected to announce that it will start paring its balance sheet, with the reductions seen likely to start this year. It is expected to keep rates on hold, but investors will be watching for fresh hints on the chances of another rate rise this year and how many could be expected in 2018. Prior to the market opening on Wednesday, the People's Bank of China (PBOC) lowered its official midpoint to 6.5670 per dollar, the weakest level since Sept. 1, 140 pips or 0.21 percent weaker than Tuesday's fix of 6.5530. But the market shrugged off the weaker fixing on Wednesday. In the spot market, the yuan opened at 6.5755 per dollar and was changing hands at 6.5675 at midday, 185 pips firmer than the previous late session close but 0.01 percent weaker than the midpoint. The gains in the spot yuan rate was supported by dollar selling by both traders and their bank clients, traders said. Corporates had snapped up dollars on Monday and Tuesday. Some companies with large dollar positions were liquidating their positions to reduce exchange losses in morning trade, while traders were taking profits on long dollar positions and heading to the sidelines ahead of the Fed announcement. "There remains huge uncertainty from the Federal Open Market Committee (FOMC) meeting, so market participants don't hold much positions for their proprietary trades. The market will pay close attention to the (Fed's) comments tonight," said a Shanghai-based trader at a foreign bank. After a strong surge over the summer, the yuan has wobbled in recent sessions, reinforcing market views that the central bank may be worried about the impact of the currency's sharp appreciation on exporters and economic growth. "We believe that a clearer RMB direction will emerge after the 19th Party Congress, which will reveal the China leadership reshuffle and road map of China reforms in coming five years," Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong wrote in a note on Wednesday. The twice-a-decade Communist Party Congress is set to begin on Oct. 18. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.55, firmer than the previous day's 95.39. The global dollar index fell to 91.764 from the previous close of 91.793. The offshore yuan was trading 0.03 percent weaker than the onshore spot at 6.5692 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 6.704, 2.04 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0416 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.567 6.553 -0.21% Spot yuan 6.5675 6.586 0.28% Divergence from 0.01%

midpoint*

Spot change YTD 5.77% Spot change since 2005 26.02%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.55 95.39 0.2

Reuters/HKEX CNH index

Dollar index 91.764 91.793 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 6.5692 -0.03% * Offshore 6.704 -2.04%

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 Kim Coghill)