SHANGHAI, Feb 14 (Reuters) - China's yuan inched up against the U.S. dollar in thin trade on Wednesday, the last trading day in the country's financial markets ahead of the long Lunar New Year holiday. The dollar eased in global markets overnight, with a gauge that tracks the unit's strength against its major peers falling nearly 0.6 percent, as investors remained on edge ahead of key U.S. inflation numbers due later on Wednesday.
The global dollar index fell to 89.412 at midday, from the previous close of 89.703. Prior to the market opening on Wednesday, the People's Bank of China (PBOC) lowered its official yuan midpoint to 6.3428 per dollar, the weakest level in nearly three weeks, after losses in spot yuan a day earlier. The midpoint was 181 pips, or 0.29 percent, weaker than Tuesday's fix of 6.3247 and was the softest since Jan. 26, 2018. China's financial markets will close on Thursday for the week-long holiday and reopen on Feb. 22. In the spot market, the onshore yuan opened at 6.3408 per dollar and was changing hands at 6.3360 at midday, 40 pips firmer than the previous late session close and 0.11 percent stronger than the midpoint. If the yuan finishes the late night session at the midday level, it would have lost 0.6 percent of its value against the dollar for the shortened trading week, following nine straight winning weeks. Trading was tepid on the last trading day before holiday. The daily trading volume stood at $4.774 billion at midday, compared with around $15 billion of half-day volume on normal days. Traders said market participants had squared their books ahead of the week-long holiday and trimmed their long yuan positions due to worries over further volatility in the greenback during the Chinese holiday. A Reuters poll published on Friday showed that the Chinese currency is expected to erase most of its strong gains so far in 2018 against the dollar over the coming year, provided the U.S. Federal Reserve delivers at least three interest rate hikes this year, as most economists expect. The yuan is expected to weaken to 6.41 per dollar in six months and then to 6.44 in a year, according to the poll of more than 60 foreign exchange strategists taken over the past week.
China's foreign exchange regulator said on Tuesday that it is now allowing both physical and cash settlements in foreign exchange forwards to make such business fully market-oriented.
Analysts at China Merchants Securities said in a note on Tuesday that the move would prompt foreign exchange demand based on real needs. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.98, weaker than the previous day's 97.09. The offshore yuan was trading 0.13 percent firmer than the onshore spot at 6.3275 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 6.4615, 1.84 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.
The yuan market at 0424 GMT:
Item Current Previous Change PBOC midpoint 6.3428 6.3247 -0.29% Spot yuan 6.336 6.34 0.06% Divergence from -0.11%
Spot change YTD 2.70% Spot change since 2005 30.63%
Item Current Previous Change Thomson 96.98 97.09 -0.1
Reuters/HKEX CNH index
Dollar index 89.412 89.703 -0.3
*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
Offshore spot yuan 6.3275 0.13% * Offshore 6.4615 -1.84%
*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)