Wires

Yuan firms on encouraging progress in Sino-U.S. trade talks

SHANGHAI, Oct 29 (Reuters) - China's yuan strengthened on Tuesday as Sino-U.S. trade negotiators edged closer towards sealing a phase one deal in a boost to hopes for de-escalating a drawn out tariff dispute. U.S. President Donald Trump said on Monday he expected to sign a trade deal with China ahead of schedule but did not elaborate on the timing, while the United States Trade Representative is looking into the possibility of extending tariff suspension on $34 billion of Chinese goods due in December. Markets had expected the two countries to sign the phase one agreement at the Asia Pacific Economic Cooperation (APEC) summit in Chile in mid-November. Prior to market opening on Tuesday, the People's Bank of China (PBOC) set the midpoint rate at 7.0617 per dollar, 145 pips or 0.2% firmer than the previous fix of 7.0762 and the strongest since Aug.26. Tuesday's official guidance rate was also the biggest daily uptick in percentage terms since Sept.16. In the spot market, onshore yuan opened at 7.0600 per dollar and was changing hands at 7.0597 at midday, 75 pips firmer than the previous late session close. Market sentiment improved on the latest signs of progress in the Sino-U.S. trade negotiations, though investors were still cautious and didn't let the yuan gallop away, several traders said. "The next eye-catching topic is: Will the U.S. remove the 'currency manipulator' label from China if trade deal is moving towards the right direction? Certainly, such event risk can't be discounted for now, which would be another potential CNY positive factor," Zhou Hao, analyst at Commerzbank in Singapore said in a note. The Trump administration labeled China a currency manipulator in August after Beijing allowed the yuan to weaken past 7 per dollar for the first time since global financial crisis. Traders are also paying close attention to the PBOC's monetary policy stance after a recent sell-off in China's 10-year government bonds. "On the macro front in China, the recent tightening liquidity as well as firming bond yields of late may continue to be interpreted as an increasingly less dovish signal," said Terence Wu, strategist at OCBC Bank in Singapore. The central bank has skipped open market operations so far this week, with maturing reverse repos draining 300 billion yuan ($42.50 billion) from money market. The PBOC is yet to conduct its targeted medium-term lending facility operations towards the end of this month. Given higher consumer inflation figures in China, most local traders do not think the PBOC would follow the U.S. Federal Reserve's expected interest rate cut this week. The Fed is due to announce its policy decision on Wednesday. The global dollar index rose to 97.776 at midday from the previous close of 97.764. The offshore yuan was trading at 7.0571 per dollar as of midday.

The yuan market at 0352 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 7.0617 7.0762 0.21%Spot yuan 7.0597 7.0672 0.11%Divergence from -0.03%

midpoint*

Spot change YTD -2.64%Spot change since 2005 17.24%

revaluation

Key indexes:

Item Current Previous ChangeThomson 91.59 91.64 -0.1

Reuters/HKEX CNH index

Dollar index 97.776 97.764 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.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 7.0571 0.04%*Offshore 7.1169 -0.78%

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. .

($1 = 7.0586 Chinese yuan)

(Reporting by Winni Zhou and John Ruwitch)