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Yuan firms as China's congress begins, market ignores weaker fixing

SHANGHAI, Oct 18 (Reuters) - China's yuan firmed against the U.S. dollar on Wednesday, with markets awaiting policy initiatives from the key Communist Party congress and shrugging off a weaker official midpoint fixing. The once-every-five-years congress began with little reaction to early comments from Chinese President Xi Jinping that China will deepen market-oriented reform of its exchange rate as well as its financial system. Xi is expected to lay out new policy initiatives and further consolidate his power for his second five-year term. Market participants said they expect a certain degree of stability in the Chinese currency during the period when Beijing holds the high-profile meeting, which will close on Oct. 24. The offshore yuan also edged up after the United States on Tuesday refrained from naming China a currency manipulator. Prior to market opening, the People's Bank of China set its midpoint for trading at 6.5991 per dollar, 108 pips or 0.16 percent weaker than the previous fix of 6.5883. Traders said Wednesday's official guidance rate largely matched market forecasts, following a rise in the dollar overnight in overseas markets. But the official fixing did not drag spot prices lower. The onshore spot market opened at 6.6160 per dollar and was changing hands at 6.6108 at midday, 142 pips firmer than the previous late session close but 0.18 percent weaker than the midpoint. Market participants said traders were building up long positions in the yuan, while some companies continued with their seasonal dollar buying. Such corporate demand for the greenback capped gains in the Chinese currency. A dealer at a Chinese bank in Shanghai said traders increased buying interest in the yuan on the first day of the 19th Party Congress. The yuan has strengthened more than 5 percent against the dollar so far this year. Pan Gongsheng, head of the country's foreign exchange regulator said on Wednesday that he expects the yuan exchange rate to have a more stable foundation after the Party Congress, adding the central bank has "basically exited" from its regular yuan intervention in the market. The United States refrained from naming China as a currency manipulator although it remained critical of the Chinese government's economic policies ahead of a planned visit to Beijing by President Donald Trump. The semi-annual U.S. Treasury currency report said no countries deserved the currency manipulator label, but it kept China on a currency "monitoring list" despite a fall in China's global current account surplus since 2016. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.77, firmer than the previous day's 95.72. The global dollar index fell to 93.476 from the previous close of 93.486. Offshore yuan was trading 0.09 percent firmer than the onshore spot at 6.605 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 6.7595, 2.37 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0353 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.5991 6.5883 -0.16% Spot yuan 6.6108 6.625 0.21% Divergence from 0.18%

midpoint*

Spot change YTD 5.08% Spot change since 2005 25.20%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.77 95.72 0.1

Reuters/HKEX CNH index

Dollar index 93.476 93.486 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 6.605 0.09% * Offshore 6.7595 -2.37%

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. .

(Editing by Jacqueline Wong)