Wires

Yuan set for best week in 4 months on brighter hopes over trade talks

SHANGHAI, Oct 11 (Reuters) - China's yuan extended gains against the dollar on Friday and was set for its best weekly performance in nearly four months, driven by hopes that U.S. and Chinese trade negotiators meeting in Washington will find a way to de-escalate a protracted trade war. Chinese equities also advanced on Friday morning after U.S. President Donald Trump characterised the first day of talks as "very, very good." But analysts advised investors to be cautious until there is a clear outcome, notably whether the talks succeed in heading off U.S. plans to increase tariffs on Chinese goods on Tuesday. "Latest indications suggest positives, but all it takes is one tweet, one headline to change the landscape. We would perhaps look for the postponement of the tariffs scheduled to be imposed on Oct.15 as a first sign of positive outcomes," strategists at OCBC Bank said in a note. Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 7.0727 per dollar, 3 pips firmer than the previous fix of 7.073. The PBOC has set its official guidance rate at around the 7.0730-per dollar level for the 14th straight trading day, and traders took it as an official attempt to keep the currency stable. In the spot market, the onshore spot yuan opened at 7.0950 per dollar and rose to a high of 7.0910 at one point, the strongest level since Sept.20. As of midday, the onshore rate was changing hands at 7.1038, 112 pips firmer than the previous late session close. If the market finishes the late night session at the midday level, it would have gained 0.62 percent to the dollar for the week, the biggest weekly gain since mid-June. One-week risk reversals for the dollar against the yuan onshore, a gauge that measures the premium paid for calls over puts, have shown an upward trend turning to positive from negative territory this week. That indicates that bullish call options have become more expensive than bearish put options. Investors were also watching out for a potential currency pact between the United States and China, following a Bloomberg report that it could form part of a deal to suspend further tariff hikes. "We would expect the U.S. to insist on some sort of enforcement mechanism, but it would have to be vague enough to make it acceptable for the Chinese," Win Thin, global head of currency strategy at Brown Brothers Harriman said. "This also means that the U.S. Treasury FX report could take on a greater degree of importance, perhaps acting as a report card of sorts about how the administration sees China's FX regime." The next semi-annual Treasury report on exchange rate practices is due on Oct.15. China was labeled a currency manipulator in August after it let the yuan slide past the key 7 per dollar level for the first time since the global financial crisis. The global dollar index fell to 98.653 at midday from the previous close of 98.701. The offshore yuan was trading at 7.1028 per dollar at midday.

The yuan market at 0416 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 7.0727 7.073 0.00%Spot yuan 7.1038 7.115 0.16%Divergence from 0.44%

midpoint*

Spot change YTD -3.25%Spot change since 2005 16.51%

revaluation

Key indexes:

Item Current Previous ChangeThomson 91.54 91.34 0.2

Reuters/HKEX CNH index

Dollar index 98.653 98.701 -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 7.1028 0.01%*Offshore 7.1489 -1.07%

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 Simon Cameron-Moore)