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Yuan inches up as markets await Fed rate decision, weigh PBOC move

SHANGHAI, March 20 (Reuters) - The yuan inched up against the U.S. dollar on Tuesday, buoyed by a firmer official midpoint, but volume was thin as traders awaited an expected U.S. rate hike later in the week which some believe will be echoed by China's central bank. With a March 21 move by the Fed seen in the bag, the focus has turned to whether it will signal a faster pace of rate rises this year and whether that will finally breathe life into the soggy dollar, curbing gains in emerging market currencies. The People's Bank of China raised rates on its open market operations and medium-term lending facility by 5 basis points each after the Fed last raised its policy rate by 25 bps in December. Some market watchers expect a similar symbolic move from the PBOC on Thursday in Asian time after China's leaders signalled in parliament that they will keep risk prevention at the top of their agenda this year. Prior to the market opening, the PBOC set the midpoint rate at 6.3246 per dollar, 74 pips or 0.12 percent firmer than the previous fix of 6.3320. In the spot market, the yuan opened at 6.3250 per dollar and was changing hands at 6.3268 at midday, 40 pips firmer than the previous late session close. Traders said the spot yuan rate was sticking to a thin range of less than 50 pips in morning trade as most investors were reluctant to pick a side in either direction before the Fed decision. The yuan has been little fazed by top officials' comments at the annual meeting of parliament, which wrapped up on March 20. Most of the remarks and pledges were reiterations of past policy. So far, the yuan has also largely shrugged off growing trade frictions with the United States, which have rattled the dollar more than the currencies of its major trading partners. The Trump administration is expected to unveil up to $60 billion in new tariffs on Chinese imports by Friday, targeting technology, telecommunications and intellectual property, two officials briefed on the matter said Monday. China's Premier Li Keqiang said on Tuesday that there will be no winner from any trade war between China and the United States, and that he hopes both sides can remain "calm."

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 97.17, weaker than the previous day's 97.19. The offshore yuan was trading 0.08 percent firmer than the onshore spot at 6.3215 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 6.4475, 1.91 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0423 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.3246 6.332 0.12% Spot yuan 6.3268 6.3308 0.06% Divergence from 0.03%

midpoint*

Spot change YTD 2.85% Spot change since 2005 30.82%

revaluation

Key indexes:

Item Current Previous Change Thomson 97.17 97.19 0.0

Reuters/HKEX CNH index

Dollar index 89.91 89.765 0.2

*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 6.3215 0.08% * Offshore 6.4475 -1.91%

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 Kim Coghill)