Wires

Trade talk uncertainty weighs on yuan after best month in nine

SHANGHAI, Nov 1 (Reuters) - China's yuan retreated on Friday after its strongest gain in nine months in October, weighed down by profit taking and renewed uncertainty over whether Beijing and Washington can reach a deal to end their protracted trade war. Market sentiment was dented by a Bloomberg report on Thursday which cited unnamed sources as saying Chinese officials have doubts about whether it is possible to reach a comprehensive long-term trade deal with Washington and U.S. President Donald Trump. Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 7.0437 per dollar, 96 pips or 0.14% firmer than the previous fix of 7.0533. In the spot market, onshore yuan opened at 7.0490 per dollar and was changing hands at 7.0440 at midday, 39 pips weaker than the previous late session close. "The news came out after the domestic close (on Thursday), and it was not until this morning when liquidity improved that the market moved to reflect investors' positions and reactions," said a trader at a Chinese bank. Developments in the Sino-U.S. trade dispute have been the main driver for the yuan since the breakout of the trade war last year, and will likely to continue to affect yuan sentiment, according to traders. Some traders said the yuan could strengthen substantially if Washington and Beijing can agree on a "phase one" deal this month proceed to the second phase of talks. Strategists at DBS Group Research said in a note that market optimism has been "pared back but not unwound" after events in the last few days. Trump said on Thursday the United States and China would soon announce a new site where he and Chinese President Xi Jinping will sign a "phase one" trade deal after Chile canceled a planned Asia-Pacific summit set for mid-November where an agreement had been expected to be sealed. Separately, investors largely shrugged off central bank's decision to issue 30 billion yuan ($4.26 billion) of bills in Hong Kong next week, as the sales will cover the maturing bills rather than new issuance. The central bank bill sales in Hong Kong were believed to mop up yuan liquidity in Hong Kong and support offshore yuan levels. Market reaction was also muted to a private business survey on Friday showing China's factory activity unexpectedly expanded at the fastest pace in well over two years in October. The findings contrasted with an official gauge on Thursday which showed a further deterioration in business conditions. The global dollar index fell to 97.225 at midday from the previous close of 97.352. The offshore yuan was trading at 7.0445 per dollar.

The yuan market at 0402 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 7.0437 7.0533 0.14%Spot yuan 7.044 7.0401 -0.06%Divergence from 0.00%

midpoint*

Spot change YTD -2.43%Spot change since 2005 17.50%

revaluation

Key indexes:

Item Current Previous ChangeThomson 91.49 91.61 -0.1

Reuters/HKEX CNH index

Dollar index 97.225 97.352 -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 7.0445 -0.01%*Offshore 7.1088 -0.92%

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 = 7.0423 Chinese yuan)

(Reporting by Winni Zhou and John Ruwitch; Editing by Kim Coghill)