SHANGHAI, March 16 (Reuters) - The yuan strengthened against the dollar on Monday, as China's central bank kept borrowing cost on its medium term loans steady after the U.S. Federal Reserve surprisingly cut rates to cushion the econiomic impact from the coronavirus outbreak. The People's Bank of China stood pat on rates for its one-year medium-term lending facility (MLF) loans , shrugging off its U.S. counterpart's decision to slash interest rates to near zero. The widening yield gap between China and the United States, along with falling cases of infection on the Chinese mainland supported the yuan early on Monday, traders said. The spot yuan opened at 7.0000 per dollar and was changing hands at 7.0025 at midday, 63 pips firmer than the previous late session close. Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong, said market reaction to PBOC's rate move was positive. "In our view, the PBOC had delivered targeted easing to support growth. In doing so, the PBOC could keep liquidity conditions ample and support the sectors being affected by the virus more effectively while avoiding policy tool depletion," he said. With the virus outbreak having peaked in China, other measures such as relending with lower interest rates would be better to help cash strapped firms. China's central bank said on Friday it was lowering the amount of cash that some qualifying banks must hold as reserves for the second time this year, releasing 550 billion yuan to support the virus-hit economy effective on Monday. The monthly fixing for China's lending benchmark or loan prime rate (LPR) is due on Friday, but traders have not reached a consensus on whether the LPR will be cut in step with MLF. A trader at a Chinese bank said the domestic currency market was also divided over the yuan's outlook after the Fed's emergency move. Some saw the step to lower rates to near zero as the culmination of bad news whereas others braced for worse to come. China's industrial output contracted at the sharpest pace in 30 years in the first two months of the year. Prior to market opening, the PBOC set the midpoint rate at 7.0018 per dollar, 15 pips firmer than the previous fix of 7.0033. Monday's fixing has lifted the yuan's CFETS index basket, a gauge that measures the yuan's strength against major trading partners, to a 10-month high of 93.78, according to Reuters calculations based on official data. The higher basket index could be a stable anchor for the region, but traders and analysts said recent central bank fixings had not been in line with their projections. Kevin Wu, head of global markets at Hang Seng Bank in Shanghai, said fixings suggested the authorites had used the counter-cyclical factor to smooth out volatility under current market conditions. "Two-way counter-cyclical adjustment of the exchange rate could help stabilise market expectations in extreme market environment," he said. The global dollar index fell to 98.312 at midday from the previous close of 98.749. The offshore yuan was trading at 7.0148 per dollar as of midday.
The yuan market at 0328 GMT:
ONSHORE SPOT:Item Current Previous ChangePBOC midpoint 7.0018 7.0033 0.02%Spot yuan 7.0025 7.0088 0.09%Divergence from 0.01%
midpoint*Spot change YTD -0.56%Spot change since 2005 18.19%
Key indexes:Item Current Previous ChangeThomson 94.23 93.76 0.5
Reuters/HKEX CNH indexDollar index 98.312 98.749 -0.4
*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 MARKETInstrument Current Difference
from onshoreOffshore spot yuan 7.0148 -0.18%*Offshore 7.1025 -1.42%
*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 Galbraith; Editing by Jacqueline Wong)