Wires

Yuan rises to 5-month high as Middle East fears ebb

SHANGHAI, Jan 7 (Reuters) - China's yuan hit a five-month high on Tuesday, reversing losses from the past three sessions as risk appetite returned to global markets on tempered fears about a U.S.-Iran confrontation. Safe-haven assets including Japanese Yen and gold eased from their peaks on Tuesday morning on relief trade, with such moves benefiting the Chinese yuan and other Asian currencies. "It's mainly because risk-off sentiment has ebbed," said a trader at a foreign bank. "But the yuan has yet to figure out a clear direction," he said, adding investors were anxiously awaiting more concrete details from the Sino-U.S. Phase 1 trade deal, which is expected to be signed on Jan. 15. Prior to the market opening on Tuesday, the People's Bank of China (PBOC) set the midpoint rate at 6.969 per dollar, 28 pips or 0.04% firmer than the previous fix of 6.9718. In the spot market, onshore yuan opened at 6.9690 per dollar and jumped to a high of 6.9522 at one point, the strongest level since Aug.2. As of midday, it was changing hands at 6.9543, 225 pips firmer than the previous late session close. Traders and analysts said rising demand for the yuan seen in forwards markets also supported the spot prices. Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong, said spikes in longer-dated offshore yuan forward rates suggest investors might be acquiring the Chinese currency for investment in yuan-denominated assets. "The less bearish RMB prospect on China-U.S. Phase 1 deal and favorable yield differential (between Chinese government bonds and U.S. Treasuries) made the RMB assets investment appealing," Cheung said in a note. "Importantly, fears of sharp one-off RMB depreciation after breaking above the 7 psychological level had receded in 2019 while ample China FX reserves outstanding above $3 trillion should help anchor foreign investors' confidence on RMB assets." One-year offshore dollar/yuan swap points have steadily risen since the start of the new year, while onshore swaps for the same tenor hovered at the highest level since June 2018. Several onshore yuan traders said many major state banks were seen swapping dollars for yuan in swap market since the start of the new year as many corporate clients usually have higher hedging demand. The global dollar index fell to 96.655 at midday from the previous close of 96.671. The offshore yuan was trading at 6.9515 per dollar as of midday.

The yuan market at 0407 GMT:

ONSHORE SPOT:

Item Current Previous ChangePBOC midpoint 6.969 6.9718 0.04%Spot yuan 6.9543 6.9768 0.32%Divergence from -0.21%

midpoint*

Spot change YTD -1.17%Spot change since 2005 19.01%

revaluation

Key indexes:

Item Current Previous ChangeThomson 92.19 92.15 0.0

Reuters/HKEX CNH index

Dollar index 96.655 96.671 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 6.9515 0.04%*Offshore 7.0215 -0.75%

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 Galbarith; Editing by Sam Holmes)