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China's yuan edges up on stronger fixing, vulnerable dollar

SHANGHAI, Jan 23 (Reuters) - China's yuan firmed against the U.S. dollar on Tuesday after the central bank set its midpoint fixing at the strongest in more than two years while the greenback remained vulnerable. The dollar pared some losses after U.S. senators struck a deal to lift a three-day government shutdown but it was still close to a three-year low against a basket of currencies.

The People's Bank of China (PBOC) recalibrated the template for daily yuan fixings recently to nullify a discretionary "counter-cyclical factor" it introduced into the formula last year to contain the currency's decline. The country's foreign exchange trading platform, overseen by the central bank, said last week the "counter-cyclical factor" had become neutral with the midpoint fixing mechanism unchanged, but the factor could be revived in the future. Prior to market opening on Tuesday, the PBOC set its official yuan midpoint at 6.4009 per dollar, 103 pips, or 0.16 percent, firmer than Monday's fix of 6.4112. Tuesday's official fixing was the strongest since Dec. 7, 2015. The strength in the yuan fixing lifted the spot rate higher. The onshore yuan opened at 6.4000 per dollar and was changing hands at 6.4027 at midday, 23 pips firmer than the previous late session close but 0.03 percent softer than the midpoint. Traders said corporate dollar selling remained stronger than demand for the greenback on Tuesday morning, but added that the 6.4 per dollar level was still a key resistance level for now. "As the weaker dollar narrative unfolds a test of 6.40 again is in the offing," said Stephen Innes, head of trading for Asia Pacific at OANDA said in a note on Tuesday. "It will go a long way to clearing the air as only through price discovery can we determine if the PBOC are no longer single-mindedly focused on the USD/CNY exchange rates, but have the confidence to use the more comprehensive basket of currencies as the central signpost." Some market participants said they were monitoring the outcome of the European Central Bank's meeting on Thursday for possible clues to future shifts in it monetary policy, which was expected to bring some volatility to major currencies. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.36, weaker than the previous day's 96.37. The global dollar index fell to 90.374 from the previous close of 90.401. The offshore yuan was trading 0.01 percent weaker than the onshore spot at 6.4033 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 6.531, 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 6.4009 6.4112 0.16% Spot yuan 6.4027 6.405 0.04% Divergence from 0.03%

midpoint*

Spot change YTD 1.63% Spot change since 2005 29.27%

revaluation

Key indexes:

Item Current Previous Change Thomson 96.36 96.37 0.0

Reuters/HKEX CNH index

Dollar index 90.374 90.401 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 6.4033 -0.01% * Offshore 6.531 -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)