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Yuan set for 1st monthly loss in 5 as PBOC caution, dollar bounce tempers rally

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SHANGHAI, Sept 29 (Reuters) - China's yuan fell 0.3 percent against the U.S. dollar on Friday and looked set to post its first monthly loss since April, weighed down by a series of weaker central bank fixings and strong dollar demand heading into a week-long holiday. A sharp reversal in the yuan in recent weeks has shaved its year-to-date gains against the greenback to around 4 percent, from 7.5 percent earlier this month. Markets believe the currency's rapid rise over the summer has unnerved authorities, who feared a blow to China's export competitiveness and started applying the brakes. The dollar's recent resurgence has added further pressure. But traders are unsure how much further the central bank will allow the yuan to slide, especially heading into the highly sensitive Communist Party Congress in mid-October. State banks had been seen selling dollars on Thursday morning, though not in large volumes, and they did not seem especially active on Friday. Prior to market opening on Friday, the People's Bank of China lowered its official yuan midpoint for the fifth straight day to 6.6369 per dollar, the weakest level since Aug. 25, reflecting weakness in the spot yuan a day earlier. The official guidance was 84 pips or 0.13 percent weaker than the previous fix of 6.6285 on Thursday. However, Friday's fixing, like those in the previous three sessions, was not as weak as markets had expected, possibly suggesting authorities were now trying to slow the yuan's fall. In the spot market, the yuan opened at 6.6655 per dollar and fell to a low of 6.6842 per dollar at one point in morning trade, its weakest level since Aug. 16. At midday, it was changing hands at 6.6780, 210 pips weaker than the previous late session close and 0.62 percent softer than the midpoint. If the spot rate closes at that level in late night trading, the yuan would have lost 1.3 percent for the month, its first monthly loss since April and its worst monthly performance since November 2016. Traders said dollar buying from bank clients including both companies and households remained strong on Friday morning as they shored up dollar holdings ahead of the week-long National Day holiday starting on Sunday. A trader at a foreign bank in Shanghai said most market participants would square their books by the end of Friday for their proprietary trade. The domestic foreign exchange market will be shut for the holiday between Oct.1 and Oct.8. Trading will resume on Oct.9. 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, weaker than the previous day's 95.17. The global dollar index rose to 93.189 from the previous close of 93.085. The offshore yuan was trading 0.13 percent firmer than the onshore spot at 6.6692 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 6.8275, 2.79 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0355 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.6369 6.6285 -0.13% Spot yuan 6.678 6.657 -0.31% Divergence from 0.62%

midpoint*

Spot change YTD 4.02% Spot change since 2005 23.94%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.06 95.17 -0.1

Reuters/HKEX CNH index

Dollar index 93.189 93.085 0.1

*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 6.6692 0.13% * Offshore 6.8275 -2.79%

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)