China's yuan firms as traders pare dollar positions ahead of Fed

SHANGHAI, Dec 13 (Reuters) - China's yuan firmed slightly against the dollar on Wednesday as domestic market participants trimmed greenback positions ahead of the U.S. Federal Reserve's policy meeting at which it's expected to raise interest rates. While the greenback stood near a four-week high against a basket of currencies on Wednesday after strong U.S. wholesale inflation data, traders in China say they anticipate a fall in the dollar index after an expected Fed hike, which has been priced in by market participants. Prior to market opening on Wednesday, the People's Bank of China set the midpoint rate at 6.6251 per dollar, 89 pips or 0.13 percent weaker than the previous fix 6.6162. Wednesday's official midpoint was fixed at the weakest level in four weeks to reflect the strength in the dollar overnight, but traders said dollar's broad impact has had little impact on the spot market. The onshore yuan opened at 6.6245 per dollar and was changing hands at 6.6183 at midday, 32 pips firmer than the previous late session close but 0.10 percent weaker than the midpoint. Traders said the market largely shrugged off a rise in the dollar overnight. A Shanghai-based trader at a foreign bank said corporate flow was mainly dominated by seasonal dollar purchases as some companies built up dollar positions for mid-month financing needs. However, the trader added dollars were sold in proprietary trade ahead of the Fed announcement. The yuan has gained around 5 percent against the greenback so far this year, following a loss of about 6.5 percent in 2016, which was the biggest annual decline since 1994. Market watchers said while one-way bets in the Chinese currency in either direction are fewer this year, some expect the yuan to depreciate modestly next year. "Taking into account slowing China growth momentum amid deleveraging and the Fed's gradual rate hike pace, we look for modest CNH depreciation next year, with the target of 6.85 at 2018-end," Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong wrote in a note. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.42, firmer than the previous day's 95.36. The global dollar index fell to 93.949 from the previous close of 94.101. The offshore yuan was trading 0.08 percent weaker than the onshore spot at 6.6239 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 6.772, 2.17 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0400 GMT:


Item Current Previous Change PBOC midpoint 6.6251 6.6162 -0.13% Spot yuan 6.6183 6.6215 0.05% Divergence from -0.10%


Spot change YTD 4.96% Spot change since 2005 25.05%


Key indexes:

Item Current Previous Change Thomson 95.42 95.36 0.1

Reuters/HKEX CNH index

Dollar index 93.949 94.101 -0.2

*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.


Instrument Current Difference

from onshore

Offshore spot yuan 6.6239 -0.08% * Offshore 6.772 -2.17%

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)