(Removes extraneous words from advisory line) SHANGHAI, Oct 10 (Reuters) - China's onshore and offshore yuan jumped against the U.S. dollar on Tuesday morning to their strongest level in more than two weeks, breaching a key psychological threshold, but gave back some gains at midday on corporate bargain-hunting for dollars. Market watchers said the sudden strengthening of the yuan followed firmer-than-expected official guidance set by the central bank, suggesting authorities are working to stabilise the Chinese currency ahead of a key national leadership meeting next week. Stability in the forex market would be a top priority as any disruption of the exchange rate and the economy is unwelcome ahead of and during China's major political event - the National Congress of the Communist Party, starting on Oct.18. Prior to market opening on Tuesday, the People's Bank of China lifted its official yuan midpoint to 6.6273 per dollar, its first firmer fixing since Sept. 22, reflecting spot yuan performance a day earlier. The official guidance was 220 pips or 0.33 percent firmer than the previous fix of 6.6493 on Monday. The move in the midpoint was the biggest strengthening in percentage terms since Sept. 8. However, Tuesday's stronger official fixing was even firmer than the market had forecast. "The 9:15 a.m. (0115 GMT) official fixing was stronger than market expectations, and that has triggered an immediate reaction in the CNH," said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong. He added that the onshore spot yuan caught up with its offshore counterpart when the domestic market opened at 9:30 a.m(0130 GMT). Cheung noted that a slip in the U.S. dollar in early Asian trade also provided support for the yuan. In the spot market, the onshore yuan opened at 6.5980 per dollar, breaching the key 6.6 per dollar level and surging to a high of 6.5898 per dollar at one point. As of midday, the onshore spot yuan was changing hands at 6.6013, 235 pips firmer than the previous late session close and 0.39 percent stronger than the midpoint. Onshore traders said bank clients quickly snapped up cheaper dollars on Tuesday morning, forcing the yuan to give back some of the gains it booked in initial trade. A trader at a foreign bank in Shanghai expected the yuan to swing in a relatively wide range in the near term. Its offshore counterpart traded 0.21 percent firmer than the onshore spot at 6.5872 per dollar at midday. It hit a high of 6.5790 per dollar in early trade on Tuesday. Separately, Zhou Xiaochuan, governor of the central bank, told Chinese business magazine Caijing in an interview late on Monday that China would continue to reform its foreign exchange rate mechanism while relaxing capital controls to allow use of the yuan to be gradually freed. Traders said Zhou's comment had no direct impact on the forex market on Tuesday morning. Mizuho's Cheung interpreted the remarks as a signal that China would stick with foreign exchange rate reform and expected related policy changes to be implemented after the CCP congress. Gao Qi, FX strategist at Scotiabank in Singapore, said in a note on Tuesday that he expected the central bank could widen the yuan trading band after the key Communist Party meeting. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.3, firming from Monday's 95.92. The global dollar index fell to 93.555 from the previous close of 93.675. 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 6.739, 1.66 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0430 GMT:
Item Current Previous Change PBOC midpoint 6.6273 6.6493 0.33% Spot yuan 6.6013 6.6248 0.36% Divergence from -0.39%
Spot change YTD 5.23% Spot change since 2005 25.38%
Item Current Previous Change Thomson 96.3 95.92 0.4
Reuters/HKEX CNH index
Dollar index 93.555 93.675 -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
Offshore spot yuan 6.5872 0.21% * Offshore 6.739 -1.66%
*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 Eric Meijer)