SHANGHAI, Nov 8 (Reuters) - China's yuan inched lower against the dollar on Thursday, after the greenback found support following the U.S. midterm elections, though analysts say the prospect of easing trade tensions could take some pressure off the currency. The U.S. midterm election resulted in a split Congress with Democrats winning control of the House of Representatives and Republicans cementing their majority in the Senate. The dollar recovered earlier losses on views the change in political landscape would not dramatically hamper President Donald Trump's ability to push fiscal stimulus through Congress. However, analysts also saw possible benefits to China's trade outlook from the political changes in Washington, which could take some of the speed out of the yuan's recent move toward the 7 to the dollar mark. "The midterm election results matched market expectations and are likely to bring positive changes to Sino-U.S. relations," said Chen Xingdong, chief China economist at BNP Paribas in Beijing. "Chances for further deterioration have dramatically lowered and market has raised hope that the two nations would be able to reach a deal." Prior to market opening on Thursday, the People's Bank of China (PBOC) set the midpoint rate at 6.9163 per dollar, the lowest since Nov. 2, 98 pips or 0.14 percent weaker than the previous fix of 6.9065. In the spot market, the onshore yuan opened at 6.9255 per dollar and was changing hands at 6.9323 at midday, 109 pips weaker than previous late session close and 0.23 percent softer than the midpoint. The onshore spot yuan swung in a tight range of about 90 pips on Thursday morning. Traders expect it to continue trading in a tight range of 6.92 to 6.94 in near term as the local unit remained tracking the dollar's movement, which was also stable as investors await the outcome of the U.S. Federal Reserve's policy meeting. "Depreciation pressure has temporarily eased, and we are unlikely to see the yuan breaching 7 per dollar now," said a trader at a foreign bank, adding the market will pay close attention to U.S. President Donald Trump and his Chinese counterpart President Xi Jinping's meeting later this month for clues on progress of the Sino-U.S. trade disputes. The two countries' leaders plan to meet on the sidelines of a G20 summit, in Argentina at the end of November for a high-stakes talk. BNP Paribas' Chen expects an over 60 percent of chance for the two countries to reach a "practical deal" in the first quarter next year, which also means that the current round of conflicts will come to an end. "The yuan exchange rate should be part of the practical deal, where China will strive to stabilise the exchange rate as far as possible while continuing to strike speculators," he said, adding pressures driving the yuan to breach the 7 level were unlikely to return soon. The Fed is due to release its decision later in the session. The Fed has raised rates three times this year and signalled a rate rise in December, with two more hikes by mid-2019. Official data on Wednesday showed China's foreign exchange reserves fell more than expected to an 18-month low in October, suggesting authorities may be slowly stepping up intervention to keep the yuan from breaking through a key support level.
"The bottom line is that investors should be vigilant, even if a narrative can be provided that there is no need for alarm," FX strategists at Bank of America Merrill Lynch (BAML) said in a note. They added that hairline cracks in falling FX reserves could give "more incentive to China to move closer to positive trade talks" with the United States at the end of this month. Separately, the yuan market was largely muted after China reported solid October trade data, which showed exports rose 15.6 percent from a year earlier, while imports expanded 21.4 percent last month, both beat market forecasts. The offshore yuan was trading at 6.9305 per dollar as of midday.
The yuan market at 0406 GMT:
Item Current Previous Change PBOC midpoint 6.9163 6.9065 -0.14% Spot yuan 6.9323 6.9214 -0.16% Divergence from 0.23%
Spot change YTD -6.14% Spot change since 2005 19.39%
Item Current Previous Change Thomson 92.81 92.78 0.0
Reuters/HKEX CNH index
Dollar index 96.196 95.997 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
Offshore spot yuan 6.9305 0.03% * Offshore 6.9849 -0.98%
*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 Sam Holmes)