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Yuan regains a little ground as trade talks start in Shanghai

HONG KONG, July 30 (Reuters) - The yuan firmed slightly on Tuesday as the start of in-person trade talks between China and the United States caused some traders to turn a little optimistic progress can be made in resolving their deep differences. Low market expectations for the talks, rooted in part by a location change to Shanghai from Beijing, sent the yuan to a five-week low on Monday. But to some, that drop appeared to be overdone. "If hopes were high, the disappointment would be greater," said one Shanghai-based trader with a Chinese bank. "The meeting could come out better than expected." A second Shanghai trader said the focus now on whether there will be progress, "and not whether there will be an agreement this week." Spot yuan stood at 6.8877 per dollar at midday, 49 pips firmer than Monday's late session close and just 0.02% softer than the midpoint, which was set by the People's Bank of China at 6.8862 prior to market open. U.S. President Donald Trump has suggested China may not want to sign a deal until the U.S. election in 2020, adding to pressure on the yuan. But "unless the trade war escalates again, the shock to the renminbi will be limited," analysts at OCBC Wing Hang Bank said in a note on Tuesday. They expect the yuan trading in a tight range in the coming weeks. Traders are also awaiting this week's policy decision by the Federal Reserve, which is expected to make a 25 basis points cut. The first trader in Shanghai says that whether the Fed makes a single cut, or if others follow, "it should be a good outcome for the renminbi, as Chinese rates will stay higher than U.S. ones." At 0405 GMT, the global dollar index was at 98.106, up slightly from the previous close of 98.044. The offshore yuan was trading at 6.8892, up 0.06% on the day but 0.02% weaker than onshore spot. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.01, firmer than the previous day's 93.92.

The yuan market at 4:05AM GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 6.8862 6.8821 -0.06%Spot yuan 6.8877 6.8926 0.07%Divergence from 0.02%

midpoint*

Spot change YTD -0.21%Spot change since 2005 20.16%

revaluation

Key indexes:

Item Current Previous ChangeThomson 94.01 93.92 0.1

Reuters/HKEX CNH index

Dollar index 98.106 98.044 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 6.8892 -0.02%*Offshore 6.9289 -0.62%

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 Noah Sin; Editing by Richard Borsuk)