China's yuan flat, but set for best month since 1994

SHANGHAI, Jan 31 (Reuters) - China's yuan was flat against the U.S. dollar on Wednesday following weaker central bank guidance, but the Chinese currency is poised for its best month in nearly a quarter of a century. The Chinese currency has registered a gain of 2.8 percent against the dollar since the start of the year, after strengthening about 6.8 percent in 2017. The dollar eased slightly against a basket of major rivals on Wednesday, showing little reaction so far to U.S. President Donald Trump's State of the Union address.

Traders said they would be monitoring the outcome of the Federal Reserve's monetary policy meeting later in the session. Markets expect the Fed to keep interest rates unchanged, but traders will look for clues on the outlook for interest rates this year that could spark volatility in major currencies. Prior to market opening on Wednesday, the People's Bank of China lowered its official yuan midpoint for a second day to 6.3339 per dollar, 27 pips weaker than the previous fix 6.3312. In the spot market, the onshore yuan opened at 6.3287 per dollar and was changing hands around 6.3279 at midday, 29 pips softer than the previous late session close. If the yuan finishes the late night session at the midday level, it would be the biggest monthly gain against the dollar in percentage terms since 1994, when market rates were unified, according to Thomson Reuters data. Traders said upward pressure on the yuan remains heavy with corporate dollar selling and extended weakness in the greenback, but seasonal dollar demand from households should pick up soon. Households usually build up their dollar positions ahead of the Lunar New Year holiday that starts on Feb. 16 this year. Xie Yaxuan, an analyst at China Merchants Securities, said the market has been "relatively shallow" in recent weeks - with higher fluctuations amid lower trading volume. The daily trading volume stood at $5.24 billion as of midday. On normal trading days, the half-day volume is usually around $15 billion. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.72, flat with the previous day's 96.72. The global dollar index fell to 89.09 from the previous close of 89.16. The offshore yuan was trading only 1 pip firmer than the onshore spot at 6.3278 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 6.455, 1.88 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0421 GMT:


Item Current Previous Change PBOC midpoint 6.3339 6.3312 -0.04% Spot yuan 6.3279 6.325 -0.05% Divergence from -0.09%


Spot change YTD 2.83% Spot change since 2005 30.79%


Key indexes:

Item Current Previous Change Thomson 96.72 96.72 0.0

Reuters/HKEX CNH index

Dollar index 89.09 89.16 -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 6.3278 0.00% * Offshore 6.455 -1.88%

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)