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Yuan extends rally after thaw in Sino-U.S. trade talks

SHANGHAI, July 1 (Reuters) - China's yuan climbed to its strongest in 10 days against the dollar on Monday, after the world's two largest economies agreed to resume trade negotiations that helped boost risk sentiment. The United States and China agreed on Saturday to restart talks after President Donald Trump offered concessions including no new tariffs and an easing of restrictions on tech company Huawei in order to reduce tensions with Beijing. The yuan lost nearly 3% since early May following a flare up in trade tensions and also on concerns that China would allow more weakness in the currency to compensate for a slowdown in its exports and to offset higher tariffs. Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.8716 per dollar, 31 pips or 0.05 percent firmer than the previous fix of 6.8747. In the spot market, onshore yuan opened at 6.8400 per dollar and rose to a high of 6.8351 at one point in morning session, the strongest level since June 21. At midday, the spot rate was changing hands at 6.8380, 270 pips firmer than the previous late session close. Traders said the gains in the yuan were reflecting changes in market sentiment due to rising optimism for a trade deal to be reached between China and the United States. "Market expectations were getting positive. Huawei was offered a concession while no more new tariffs would be imposed," said a trader at a foreign bank. "But the yuan is unlikely to be at the start of a one-way upward trajectory before the outcome of the trade negotiations." Analysts and economists expected the yuan's rally on Monday would not be sustainable, as gains were being driven by sentiment rather than fundamentals. "With the ceasefire, the RMB is likely to fluctuate around 6.90 before an attempt to test above 7 by end 3Q19," Larry Hu, chief China economist at Macquarie in Hong Kong said in a note. Zhou Hao, analyst at Commerzbank in Singapore described the gains in the yuan as a "knee-jerk" reaction. "Fundamentally the Chinese currency is still under depreciation pressure due to capital outflows and a challenging growth outlook," he said, but added that "there is an invisible hand behind the USD/CNY, which makes any massive market movement very unlikely." The PBOC has persistently fixed its official guidance rate firmer than market consensus since mid-May, and traders and analysts interpreted it as an official attempt to reduce price swings and counteract depreciation pressure in the yuan. An official manufacturing survey and a private sector business survey showed on Monday that China's factory activity shrank more than expected in June, highlighting the need for more economic stimulus. The global dollar index rose to 96.351 at midday from the previous close of 96.13. The offshore yuan was trading at 6.8375 per dollar as of midday.

The yuan market at 0404 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 6.8716 6.8747 0.05%Spot yuan 6.838 6.865 0.39%Divergence from -0.49%

midpoint*

Spot change YTD 0.51%Spot change since 2005 21.04%

revaluation

Key indexes:

Item Current Previous ChangeThomson 93.1 93.16 -0.1

Reuters/HKEX CNH index

Dollar index 96.351 96.13 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 6.8375 0.01%*Offshore 6.8727 -0.02%

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 Andrew Galbraith Editing by Jacqueline Wong)