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China's yuan hits its highest since 2015 devaluation, set for 8th winning week

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SHANGHAI, Feb 2 (Reuters) - China's yuan strengthened to a fresh 2-1/2-year high against the U.S. dollar on Friday thanks to extended weakness in the greenback, with the Chinese currency now near the levels it reached just before a shock devaluation in August 2015. The yuan ended January with a 3.5 percent gain against the dollar, its best monthly performance since market rates were unified in 1994, Thomson Reuters data showed. The strong momentum continued on Friday, pushing the rate to a level that was last seen on Aug.11 2015, when China shocked global markets with a sharp 2 percent currency devaluation. Prior to market opening on Friday, the People's Bank of China (PBOC) lifted its official yuan midpoint to 6.2885 per dollar, the strongest level since August 2015, breaching the key 6.3 level. Friday's midpoint was 160 pips, or 0.25 percent, firmer than Thursday's fix of 6.3045 and the strongest since Aug. 11, 2015. In the spot market, the onshore yuan opened at 6.2828 per dollar and surged to a high of 6.2772 at one point in morning trade, also the highest since the 2015 devaluation. As of midday, the yuan was changing hands at 6.2854 at midday, 111 pips firmer than the previous late session close and 0.05 percent stronger than the midpoint. If the onshore spot yuan ends the late night session at the midday level it would have gained 0.7 percent against the dollar for the week, recording an eighth consecutive rising week and its longest winning streak since mid-2013. The yuan gained 1.2 percent a week earlier. Traders said spot yuan trade tracked movements in the global dollar index on Friday morning, adding that they would be watching the U.S. nonfarm payrolls report due later on Friday for clues on the strength of the U.S. economy. Policy insiders and analysts said China's central bank is reasonably comfortable with the yuan's sharp gains against a dollar that is broadly weakening, but that strength could become an issue if gains against other currencies affect its export competitiveness. Louis Kuijs, head of Asia economics at Oxford Economics said he does not expect much more appreciation going forward, either against the dollar or versus the basket. "In terms of global FX, we do not expect the U.S. dollar to weaken much further in the rest of 2018. And, while China's exports are currently doing well, benefiting from buoyant global demand momentum, we expect global trade growth to soften a bit during 2018. That would likely change the balance of considerations for policymakers against further trade-weighted strengthening," Kuijs said in a note. Kuijs revised his forecast for the yuan to trade at 6.32 per dollar by the end of this year, up from 6.41 previously. Wang Tao, chief China economist at UBS Investment Research, also revised up her forecasts, seeing the yuan at 6.2 per dollar at end-2018 and 6.1 at end-2019 versus her previous 6.4 and 6.3 calls, reflecting "more base-case dollar weakness". The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.32, firmer than the previous day's 97.22. The global dollar index rose to 88.736 from the previous close of 88.671. The offshore yuan was trading 0.17 percent weaker than the onshore spot at 6.2962 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 6.4175, 2.01 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0515 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.2885 6.3045 0.25% Spot yuan 6.2854 6.2965 0.18% Divergence from -0.05%

midpoint*

Spot change YTD 3.52% Spot change since 2005 31.68%

revaluation

Key indexes:

Item Current Previous Change Thomson 97.32 97.22 0.1

Reuters/HKEX CNH index

Dollar index 88.736 88.671 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 6.2962 -0.17% * Offshore 6.4175 -2.01%

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 Eric Meijer)