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China’s yuan set for best week in two months as dollar bulls lie low

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SHANGHAI — China’s yuan inched higher

against the dollar on Friday and looked set for its biggest

weekly gain in two months, as slower-than-expected U.S.

inflation readings prompted some investors to dial back hawkish

Federal Reserve expectations.

Meanwhile, domestic market participants expect the People’s

Bank of China (PBOC) to withdraw some cash from the banking

system at a policy loan rollover next Monday.

Prior to market opening, the PBOC set the midpoint rate

at 6.7413 per dollar, 89 pips weaker than the

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previous fix 6.7324.

In the spot market, the onshore yuan opened at

6.7440 per dollar and was changing hands at 6.7355 at midday, 95

pips firmer the previous late session close.

If the yuan finishes the late night session at the midday

level, it would have gained 0.41% to the dollar for the week,

its biggest such gain since early June.

Traders said much of the yuan strength was reacting to

dollar weakness after U.S. inflation report, which came in not

as hot as expected. The data prompted some investors to slash

bets on another 75-basis-point Fed rate hike in September.

But the yuan was likely to remain rangebound as some

investors await the next catalyst.

A trader at a Chinese bank said some market participants

have switched their attention to the PBOC’s medium-term policy

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loan operation to gauge its monetary policy stance.

A Reuters poll showed China’s central bank was expected to

partially roll over a maturing medium-term lending facility

(MLF) on Monday, while keeping the rate unchanged, as rising

inflationary pressures limit room for policy

support.

Gao Qi, FX strategist at Scotiabank, said the central bank

would “not flood the economy with excessive liquidity and a

weaker yuan that makes imports into China more expensive,” which

is “not in the monetary authority’s interest at this stage.”

Gao expects China to maintain its pro-growth stance and keep

the yuan stable in the run-up to the politically significant

20th Party Congress later in the year.

By midday, the global dollar index stood at 105.189,

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while the offshore yuan was trading at 6.7326 per

dollar.

The yuan market at 0401 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.7413 6.7324 -0.13%

Spot yuan 6.7355 6.745 0.14%

Divergence from -0.09%

midpoint*

Spot change YTD -5.65%

Spot change since 2005 22.88%

revaluation

Key indexes:

Item Current Previous Change

Thomson 0.0

Reuters/HKEX

CNH index

Dollar index 105.189 105.09 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 6.7326 0.04%

*

Offshore 6.6616 1.20%

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 Brenda Goh; Editing by Sam Holmes)

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