China's yuan eases as global trade war fears hurt sentiment

SHANGHAI, March 8 (Reuters) - China's yuan eased against the U.S. dollar on slightly stronger demand for the greenback on Thursday, while the market focused on trade issues between the world's top two economies. Positive U.S. economic data and the White House saying some countries may be exempted from planned U.S. import tariffs on steel and aluminium helped the dollar recover ground on Thursday. Chinese trade data for February had little impact on the market. Exports unexpectedly surged at the fastest pace in three years last month, data showed on Thursday, suggesting China's economic growth remains resilient even as trade relations with the United States rapidly deteriorate. But traders say data for the first two months of the year are distorted by the week-long Lunar New Year holiday in mid-February. Instead, they monitored the latest developments on U.S. tariffs and China's possible retaliation. Chinese Foreign Minister Wang Yi said on Thursday that China would make a necessary response in the event of a trade war with the United States but said such a war would only harm all sides.

Retaliatory action by Beijing against the heavy tariffs could lead to a weaker yuan, market watchers said. Economists at Capital Economics said on Thursday that trade war fears could trigger intervention. "If the PBOC has learnt the lessons from the last renminbi panic, they will promptly step up FX sales to prevent a sharp weakening of the currency. This would mean only a modest depreciation of the renminbi this year," they said in a note. Prior to market opening on Thursday, the People's Bank of China set the midpoint rate at 6.3239 per dollar, 55 pips or 0.09 percent firmer than the previous fix 6.3294. In the spot market, the onshore yuan opened at 6.3263 per dollar and was changing hands at 6.3270 at midday, 64 pips weaker than the previous late session close and 0.05 percent softer than the midpoint. Traders said corporates were buying dollars on Thursday, which dragged spot yuan lower. But some expect the yuan to be range bound in the near term as the global dollar index pulled away from a two-week low, but remained weak amid trade tensions. A trade battle could mean "more voices (in China) against de-leveraging and restructuring" to drag the yuan lower against the dollar, Cliff Tan, East Asian head of global markets research of The Bank of Tokyo Mitsubishi UFJ said. "Growth concerns may lead FX traders to be more reluctant to keep pushing USD/CNY down," Tan said in a note. The global dollar index, a gauge that measures the dollar strength against six other major currencies, stood 89.575 as of midday, compared with the previous close of 89.637. China's foreign exchange reserves fell in February, official data showed late on Wednesday, posting their first decline in 13 months, weighed by negative valuation effects amid wild swings in global financial markets. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.84, weaker than the previous day's 96.86. The offshore yuan was trading 0.06 percent firmer than the onshore spot at 6.323 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 6.451, 1.97 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0428 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.3239 6.3294 0.09% Spot yuan 6.327 6.3206 -0.10% Divergence from 0.05%

midpoint*

Spot change YTD 2.84% Spot change since 2005 30.81%

revaluation

Key indexes:

Item Current Previous Change Thomson 96.84 96.86 0.0

Reuters/HKEX CNH index

Dollar index 89.575 89.637 -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 6.323 0.06% * Offshore 6.451 -1.97%

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 Ruwtich Editing by Jacqueline Wong)