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China's yuan inches up as post-Fed dollar rally fades

SHANGHAI, Sept 22 (Reuters) - China's yuan firmed against the U.S. dollar on Friday as the greenback pared gains made following the Federal Reserve's hawkish policy statement and as investors took the latest Chinese sovereign rating downgrade in their stride. However, the Chinese currency remains on course for its second weekly loss. It has lost more than 1,500 pips from a 21-month peak hit on Aug. 8 as a rallying yuan forced authorities to put a brake on its rise and relax some restrictions on capital outflows. Prior to market opening on Friday, the People's Bank of China raised its official midpoint for the first time in four days to 6.5861, only 6 pips firmer than the previous fix of 6.5867 on Thursday. Traders said the official guidance matched market expectations. The spot yuan opened at 6.5718 per dollar and was changing hands at 6.5901 at midday, 21 pips firmer than the previous late session close but 0.06 percent softer than the midpoint. S&P downgraded China's long-term sovereign credit rating on Thursday, less than a month ahead of one of the country's most sensitive political gatherings, citing increasing risks from its rapid build-up of debt. The market had little reaction following the statement on Thursday evening and was largely muted on Friday morning. Kim Eng Tan, an S&P senior director of sovereign ratings, said in a conference call on Friday that he didn't see "a direct link between the sovereign rating and the trend of the renminbi." If the spot yuan closes the late night session at the current level, it would have weakened 0.6 percent against the greenback, set for the second weekly loss. Traders said the onshore spot yuan opened higher on Friday morning to reflect the dollar's movement overnight, but the gains in the yuan were capped as bank clients rushed to load up their dollar positions on Friday morning. Market watchers said S&P was the third of the three major rating agencies to downgrade China and that it was a catch-up move. "The spot (USD/CNY) rate should go up as it did last time when Moody's downgraded China's rating in May. But the previous experience has prevented investors from testing highs in the (USD/CNY) prices," said a trader at a foreign bank in Shanghai. However, several traders said they saw major state-owned banks selling dollars in morning trade to stabilize the spot yuan rate from falling. Some suspected the selling was on behalf of the authorities, while some believed big banks traded on their own behalf. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.69, firmer than the previous day's 95.61. The global dollar index fell to 92.022 from the previous close of 92.259. The offshore yuan was trading 0.15 percent firmer than the onshore spot at 6.5804 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 6.7165, 1.94 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0414 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.5861 6.5867 0.01% Spot yuan 6.5901 6.5922 0.03% Divergence from 0.06%

midpoint*

Spot change YTD 5.41% Spot change since 2005 25.59%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.69 95.61 0.1

Reuters/HKEX CNH index

Dollar index 92.022 92.259 -0.3

*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 6.5804 0.15% * Offshore 6.7165 -1.94%

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 Sam Holmes)