Wires

Yuan inches up after Sino-U.S. trade call, offshore liquidity tightens

SHANGHAI, Nov 26 (Reuters) - China's yuan inched up on Thursday, led by firmer central bank guidance and improved investor sentiment after top U.S and Chinese trade negotiators discussed ways to ease their long and damaging trade dispute. Beijing said negotiators from both nations held a phone call on Tuesday morning, as the two sides tried to hammer out a preliminary "phase one" deal in a trade war that has dragged on for 16 months. Prior to market opening on Tuesday, the People's Bank of China (PBOC) set the midpoint rate at 7.0344 per dollar, 53 pips firmer than the previous fix of 7.0397. In the spot market, onshore yuan opened at 7.0268 per dollar and was changing hands at 7.0314 at midday, 41 pips stronger than the previous late session close. Several traders said while news of the phone call pushed the yuan up slightly, the market has become somewhat skeptical about news about such high level discussions, which have yet to yield any progress. "The market has largely priced in the situation that no fresh tariffs will be implemented in mid-December," said a trader at a Chinese bank. A second trader at a Chinese bank said the yuan lacked any clear guidance and expected the local unit to continue rangebound trading before solid confirmation on the Sino-U.S. trade talks. Separately, tighter yuan liquidity in Hong Kong, seen in spikes in the short-end borrowing cost, supported the offshore yuan. The CNH Hong Kong Interbank Offered Rate benchmark (CNH Hibor), set by the city's Treasury Markets Association (TMA), rose to 3.96667% for overnight contracts on Tuesday, the highest level since Aug.26. It was 80 basis points higher than the previous fix of 3.16500%. Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong said the rise in the overnight Hibor was largely driven by overseas demand for mainland Chinese stocks following MSCI's further A-share inclusion and sovereign bonds denominated in offshore yuan. "As you can see, only overnight and tomorrow/next rates were suddenly higher, while other tenors were barely changed. So, it should be short-term causes," he said. The spurt in CNH funding costs usually discourages short yuan traders as their borrowing costs rose dramatically. China's Ministry of Finance is scheduled to sell 3.5 billion yuan ($497.24 million) of two-year offshore yuan sovereign bonds and another 1.5 billion yuan in five-year tenor in Hong Kong on Wednesday. The offshore yuan was trading at 7.0262 per dollar as of midday. The global dollar index fell to 98.294 at midday from the previous close of 98.323.

The yuan market at 0400 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 7.0344 7.0397 0.08%Spot yuan 7.0314 7.0355 0.06%Divergence from -0.04%

midpoint*

Spot change YTD -2.25%Spot change since 2005 17.71%

revaluation

Key indexes:

Item Current Previous ChangeThomson 92.34 92.21 0.1

Reuters/HKEX CNH index

Dollar index 98.294 98.323 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 7.0262 0.07%*Offshore 7.1001 -0.93%

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 = 7.0389 Chinese yuan)

(Reporting by Winni Zhou and John Ruwitch; Editing by Sam Holmes)