WRAPUP 1 -China's yuan, bonds build on strong rally as trade hopes sway mood

Andrew Galbraith

SHANGHAI, Nov 6 (Reuters) - China's yuan strengthened on Tuesday, hovering below the psychologically important 7-per-dollar level, a day after a surge of optimism around trade talks between China and the United States pushed the local currency to three-month highs.

The onshore spot yuan opened at 6.9967 per dollar before easing slightly to 6.9973 per dollar around 0230 GMT. That was stronger than Tuesday's late session close of 7.0058 per dollar. The yuan touched 6.9880 earlier on Tuesday, its firmest level since Aug. 2.

The gains in the onshore yuan came after the People's Bank of China (PBOC) set its daily reference rate for the currency's trading band at 7.0080, its strongest level since Aug. 8.

The offshore yuan also strengthened from Tuesday's close, edging up 0.1% against the dollar to 6.9951.

Chinese and global markets took on a risk-on tone this week on growing signs that Washington and Beijing were edging closer to sealing a preliminary trade pact to roll back their bruising 16-month long tariff war.

People familiar with the negotiations have told Reuters that China is pushing U.S. President Donald Trump to remove the Sept. 1 tariffs as part of a "phase one" U.S.-China trade deal,

The optimism around a trade deal lifted the yuan on Tuesday despite the PBOC cutting the interest rate on its one-year medium-term lending facility (MLF) loans, a closely watched policy lending rate, by five basis points.

Market observers saw the small cut in the one-year MLF rate as a salve for the onshore bond market, which has been hit by a selloff in recent months amid worries that relatively high consumer inflation impeded Beijing's ability to ease policy despite slowing domestic growth and the protracted trade war.

Chinese 10-year Treasury futures for December delivery , the most-traded contract, edged up 0.08% on Wednesday after rising 0.35% the previous day following the MLF cut.

The yield on China's benchmark 10-year treasury bonds had risen nearly 30 basis points from September lows before the PBOC's latest MLF cut. The bonds yielded 3.281% on Wednesday, according to Refinitiv data, down about 2 basis points from Monday, before the cut was announced.

Analysts at Bank of America Merrill Lynch cautioned that the MLF cut, and a likely reduction in the central bank's benchmark Loan Prime Rate (LPR) in November would have a limited impact.

The LPR is linked to the MLF rate and is set on the 20th of each month.

"The actual impact on driving down bank loan pricing and servicing the government mandate of lowering funding cost for corporates is likely to be quite limited. After all, the lower LPR only applies to the new loans, but the pricing of the existing loans is still based on the benchmark interest rates," they said.

China's equity markets, which had risen for three consecutive sessions on the buoyant mood around trade talks, stepped back on Wednesday.

The country's benchmark Shanghai Composite Index gave up early gains to fall 0.23% shortly before the midday break. The blue-chip CSI300 index was down 0.21%.

Hong Kong's Hang Seng was 0.23% lower, and Hong Kong-listed H-shares gave up 0.25%.

(Reporting by Andrew Galbraith Editing by Shri Navaratnam)