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China's yuan slips, midpoint eases after five days of gains

SHANGHAI, Jan 18 (Reuters) - China's yuan eased against the dollar on Thursday, after the central bank set lower guidance for the first time in six trading days in reaction to a firmer U.S. currency. The dollar arrested its decline against its major trading partners, although its outlook remains dour as other central banks, besides the U.S. Federal Reserve, are moving away from the ultra low-rate stance and unconventional tools they adopted after the 2008 global credit crisis. The dollar's slight recovery reined in the yuan's recent rally, but the renminbi has still logged a year-to-date gain of more than one percent against the U.S. currency. The yuan 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, the PBOC set the midpoint rate at 6.4401 per dollar, 66 pips or 0.1 percent weaker than the previous fix of 6.4335 on Wednesday. Thursday's official yuan guidance rate was the first weakening since Jan. 10. And the softer fixing also dragged spot yuan lower. The onshore yuan opened at 6.4400 per dollar and was changing hands at 6.4380 at midday, 45 pips weaker than the previous late session close. Traders said the weakness in the spot yuan rate was reacting to the rebound in the dollar, in addition to seasonal corporate demand for the greenback. "The yuan has not figured out a clear directional trend yet," said a trader at a Chinese bank in Shanghai, adding that the Chinese currency was likely to remain in a tight range of 6.42 to 6.44 per dollar in the near term. China's foreign exchange regulator said on Thursday that recent yuan appreciation was driven by China's improving economy and the weaker dollar. It also said two-way volatility in the Chinese currency will become a "new normal." Earlier, official data showed that China's commercial banks purchased a net $6.0 billion of foreign exchange in December, while it sold a net $111.6 billion for the full year.

China is due to announce its fourth quarter and full-year gross domestic product (GDP) data at 0700 GMT 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. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.13, firmer than the previous day's 96.01. The global dollar index rose to 90.916 from the previous close of 90.541. The offshore yuan was trading at the same level as the onshore spot at 6.4380 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 6.569, 1.96 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 6.4401 6.4335 -0.10% Spot yuan 6.438 6.4335 -0.07% Divergence from -0.03%

midpoint*

Spot change YTD 1.07% Spot change since 2005 28.56%

revaluation

Key indexes:

Item Current Previous Change Thomson 96.13 96.01 0.1

Reuters/HKEX CNH index

Dollar index 90.916 90.541 0.4

*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 6.438 0.00% * Offshore 6.569 -1.96%

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)