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China's yuan extends rally, midpoint set at 2-year high

SHANGHAI, Jan 17 (Reuters) - China's yuan strengthened against the dollar on Wednesday, as the central bank set its firmest midpoint in more than two years amid broad dollar weakness and heavier corporate dollar selling. The dollar fell to a three-year low against its peers, as the euro edged back after shaking off a setback to Chancellor Angela Merkel's chances of forging a "grand coalition" in Germany. The weaker dollar has lent a helping hand to the yuan. The recent rally in the Chinese currency has pushed its gains against the dollar to nearly 1.2 percent so far this year. The renminbi climbed around 6.8 percent on the greenback during 2017, reversing three straight years of depreciation. The People's Bank of China (PBOC) recalibrated the template for daily yuan fixings last week to nullify a discretionary counter-cyclical factor it introduced into the formula last year to contain the currency's decline. That, analysts said, meant the yuan would move in line with the currencies of its trading partners and was seen as an attempt by authorities to cap the currency. Prior to market opening on Wednesday, the PBOC set its official yuan midpoint at a more than two-year high at 6.4335 per dollar. Wednesday's official midpoint was 37 pips, or 0.06 percent, firmer than the previous fix of 6.4372 on Tuesday and was the strongest since Dec. 10, 2015. In the spot market, the onshore yuan opened at 6.4300 per dollar and was changing hands at 6.4320 at midday, 49 pips firmer than the previous late session close and 0.02 percent stronger than the midpoint. Traders said corporate dollar sales remained stronger than demand on Wednesday morning, but bargain hurting for the cheaper dollar has slowed the pace of the yuan's ascent. A trader at a foreign bank said that despite recent rapid gains in the yuan, the domestic market was not taking big bets in either direction. "In our opinion, CNY is not an outlier given the backdrop of broad USD weakness. In this case, there is no emergency for the authorities to conduct a directional intervention," Zhou Hao, analyst at Commerzbank in Singapore said in a note. The central bank said on Wedensday that a pre-announced reduction in the amount of cash some Chinese banks must hold as reserves will become effective on Jan. 25. Separately, more central banks in Europe revealed plans on Tuesday to hold the yuan as part of their foreign currency reserves, highlighting the Chinese currency's rise into an elite league of the world's major reserve currencies. China is due to announce its fourth quarter and full-year gross domestic product (GDP) data on Thursday, with a Reuters poll forecasting the economy had expanded 6.8 percent last year and would slow to 6.5 percent in 2018. Chinese Premier Li Keqiang told state media last week he expected the broad economy to have expanded around 6.9 percent last year. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.92, firmer than the previous day's 95.91. The global dollar index rose to 90.451 from the previous close of 90.393. The offshore yuan was trading at the same level as the onshore spot at 6.4320 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 6.564, 1.99 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0417 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.4335 6.4372 0.06% Spot yuan 6.432 6.4369 0.08% Divergence from -0.02%

midpoint*

Spot change YTD 1.16% Spot change since 2005 28.68%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.92 95.91 0.0

Reuters/HKEX CNH index

Dollar index 90.451 90.393 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

from onshore

Offshore spot yuan 6.432 0.00% * Offshore 6.564 -1.99%

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)