Yuan strengthens past key level, then reverses on dollar demand

SHANGHAI, Jan 9 (Reuters) - China's yuan slipped against the U.S. dollar on Tuesday, breaching a key threshold, as companies had slightly stronger appetites for the U.S. currency. The level breached early on Tuesday was 6.5 yuan to the dollar. When the yuan strengthened past that level, traders doubting that the Chinese currency could get any firmer rushed to stock up on dollars. Prior to market opening on Tuesday, the People's Bank of China (PBOC) set the midpoint rate at 6.4968 per dollar, 136 pips or 0.21 percent weaker than Monday's fix of 6.4832. In the spot market, the onshore yuan opened at 6.5025 per dollar, then rose to a high of 6.4981 at one point in the morning. As of 0500 GMT, the spot yuan rate was 6.5020, or 36 pips weaker than the previous late session close and 0.08 percent softer than the midpoint. Some Traders said they expected the yuan to not move widely in the near term, adding that corporate dollar sales could also emerge if the yuan weakened further. However, the market does not have a consensus on the yuan's movement for this year, and there's a range of views. China International Capital Corporation (CICC) on Monday revised its end-2018 forecast for the yuan, which it now expects to strengthen to 6.28 to the dollar. Its previous forecast was 6.48. The yuan's strengthening will reflect "faster improvement of economic fundamentals and investment returns in China", CICC said. Wang Tao, chief China economist at UBS Investment Research, told reporters in Shanghai on Tuesday she expected the yuan to stay largely stable this year, with onshore spot yuan trading at 6.7 per dollar at the end of 2018. On Tuesday, the official China Securities Journal, citing industry experts, said China is expected to further promote market-oriented reforms in its currency exchange system, and gradually rely more on indirect means to control the exchange rate such as interest rate adjustments. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.87, weaker than the previous day's 96.02. The global dollar index fell to 92.271 from the previous close of 92.358. The offshore yuan was trading only 2 pips stronger than the onshore spot at 6.5018 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, 2.16 percent weaker than midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0500 GMT:


Item Current Previous Change PBOC midpoint 6.4968 6.4832 -0.21% Spot yuan 6.502 6.4984 -0.06% Divergence from 0.08%


Spot change YTD 6.84% Spot change since 2005 27.29%


Key indexes:

Item Current Previous Change Thomson 95.87 96.02 -0.2

Reuters/HKEX CNH index

Dollar index 92.271 92.358 -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.


Instrument Current Difference

from onshore

Offshore spot yuan 6.5018 0.00% * Offshore 6.6405 -2.16%

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 Richard Borsuk)