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China's yuan eases on weaker midpoint, dollar bounce

SHANGHAI, Jan 4 (Reuters) - China's yuan eased against the U.S. dollar on Thursday, after the central bank lowered its official midpoint for the first time in five days as the greenback strengthened on solid U.S. economic data. The dollar extended gains, buoyed by upbeat U.S. manufacturing and construction data and supportive minutes from the Federal Reserve's latest policy meeting, which showed it remained on track to raise interest rates several times this year. Prior to market opening on Thursday, the People's Bank of China (PBOC) set the midpoint rate at 6.5043 per dollar, 123 pips or 0.19 percent weaker than the previous fix of 6.4920. Thursday's fixing was the biggest one-day weakening in percentage terms since Nov. 6, 2017. In the spot market, the onshore yuan opened at 6.5070 per dollar and was changing hands at 6.5078 at midday, 73 pips weaker than the previous late session close and 0.05 percent softer the midpoint. Traders said the overall market was stable in morning trade, while gains in the greenback overnight led domestic market participants to cover some of their short positions in the dollar. A Shanghai-based trader at a foreign bank said he expected the yuan to remain rangebound in the near term. Some market participants noted that trading was more active when the yuan was firmer than 6.5 per dollar. "The PBOC may consider to step in to curb the RMB appreciation bias if the CNY spot rallied further below 6.5 level," Ken Cheung, senior FX strategist at Mizuho Bank in Hong Kong said in a note on Wednesday. Market watchers and some traders expect the dollar to gain strength through the year and drag the Chinese currency weaker, despite the yuan posting its best gain in nine years in 2017. Brown Brothers Harriman said in a note on Thursday it expects the yuan to weaken gradually this year, trading at 6.9 per dollar at the end of the fourth quarter. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.83, weaker than the previous day's 95.84. The global dollar index rose to 92.184 from the previous close of 92.162. The offshore yuan was trading 0.05 percent firmer than the onshore spot at 6.5048 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 6.6405, 2.05 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0356 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.5043 6.492 -0.19% Spot yuan 6.5078 6.5005 -0.11% Divergence from 0.05%

midpoint*

Spot change YTD 6.74% Spot change since 2005 27.18%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.83 95.84 0.0

Reuters/HKEX CNH index

Dollar index 92.184 92.162 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 6.5048 0.05% * Offshore 6.6405 -2.05%

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 Jacqueline Wong)