Yuan firms on first day after 'Golden Week' holiday as top-level trade talks loom


SHANGHAI, Oct 8 (Reuters) - The yuan strengthened against the dollar on Tuesday, as Chinese markets reopened after a week-long holiday and as traders turned attention to pivotal top-level Sino-U.S. trade negotiations in Washington late this week. A measure of implied volatility of the yuan rose to its highest in a month, because of uncertainty about how the talks will go and the fact higher U.S. tariffs on $250 billion of Chinese goods are scheduled to take effect on Oct. 15. Prospects for progress at the talks were dimmed after the United States placed 28 Chinese public security bureaus and companies on a U.S. trade blacklist. In the spot market, the onshore yuan market opened at 7.1328 per dollar and was changing hands at 7.1260 at midday, 220 pips stronger than the previous late session close on Sept. 30. Several yuan traders said the strength in the spot yuan was largely due to the headlines on resumption of trade talks involving Chinese Vice-Premier Liu He, while a firmer-than-expected midpoint fixing continued to support market sentiment. The People's Bank of China (PBOC) set the midpoint rate at 7.0726 per dollar prior to market open, 3 pips firmer than the previous fix of 7.0729. The PBOC has persistently set its official midpoint firmer than market forecasts since late August in a very tight range just above the key 7.1 per dollar level, with market widely interpreting it as an official attempt to keep the yuan stable. "Steady as she goes for the yuan fix as the PBOC continues to veer the yuan in a stable tangent ahead of critical trade talks," Stephen Innes, Asia Pacific market strategist at AxiTrader, said in a note. "But interestingly of note yuan and currency manipulation-elated trade war headlines have been conspicuous by their absence. Suggesting that any currency-related headlines could trigger an outsized response as the markets have not fully priced in this risk," Innes said. Some yuan traders said they will await the hard-to-predict outcome of the Oct. 10-11 top level talks before making significant bets on the currency. If there is no limited or other deal emerging and the higher U.S. tariffs kick in on Oct. 15, that will be very negative for the yuan, they said. The one-week contract of the implied volatility, which gauges investors' expectations for swings in the dollar against the yuan in a week of time, rose to 5.175 on Tuesday morning, the highest level since Sept. 4. The global dollar index fell to 98.957 at midday from the previous close of 98.967. The offshore yuan was trading at 7.1241 per dollar as of midday.

The yuan market at 0317 GMT:


Item Current Previous ChangePBOC midpoint 7.0726 7.0729 0.00%Spot yuan 7.126 7.148 0.31%Divergence from 0.76%


Spot change YTD -3.55%Spot change since 2005 16.15%


Key indexes:

Item Current Previous ChangeThomson 91.43 91.3 0.1

Reuters/HKEX CNH index

Dollar index 98.957 98.967 0.0

*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.


Instrument Current Difference

from onshore

Offshore spot yuan 7.1241 0.03%*Offshore 7.174 -1.41%

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 Richard Borsuk)

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