Yuan edges up, but gains curbed by corporate dollar demand

SHANGHAI (Reuters) - China's yuan rose to a more than one-week high against the U.S. dollar on Wednesday helped by firmer central bank guidance, but gains were capped by rising corporate demand for the greenback.

Prior to market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.4040 per dollar, 117 pips firmer than the previous fix and in line with a softer dollar.

The spot market opened at 6.4036 per dollar and climbed to 6.3910 at one point, the strongest since May 28.

As of midday, the spot yuan was changing hands at 6.3951, 57 pips firmer than the previous late session close and 0.14 percent stronger than the midpoint.

The dollar fell against a basket of currencies due to a firmer euro (EUR=) and concerns that the United States could pull out of a trade pact with Canada and Mexico. [FRX/]

Traders said the 6.4 per dollar was a psychologically important level for investors, with rising corporate demand for the greenback emerging after the yuan strengthened past the threshold.

"The yuan didn't change its direction to a strengthening path as (many corporate clients) were scooping up cheaper dollars in morning trade," a trader at a foreign bank in Shanghai said.

The trader expected the yuan could face some downward pressure in the near term as June marks a traditional peak for dollar demand.

Some market participants said the yuan could also face volatility from the outcome of the European Central Bank's policy meeting on June 14, which could put pressure on emerging markets if the ECB states when its stimulative policy will end.

Separately, the PBOC lent 463 billion yuan ($72.40 billion) to financial institutions on Wednesday via its 1-year medium-term lending facility (MLF), with interest rates unchanged.

Analysts believe the central bank may be adjusting the way it conducts its various liquidity operations as financing conditions change, with Wednesday's move possibly pushing back the timing of another expected cut in banks' reserve requirement ratios.

The Thomson Reuters/HKEX Global CNH index (RXYH), which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 98.2, firmer than the previous day's 98.13.

The global dollar index (DXY) fell to 93.872 from the previous close of 93.898.

The offshore yuan was trading 0.13 percent firmer than the onshore spot at 6.387 per dollar.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.4955, 1.41 percent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0424 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 6.404 6.4157 0.18%

Spot yuan 6.3951 6.4008 0.09%

Divergence from -0.14%

midpoint*

Spot change YTD 1.75%

Spot change since 2005 29.42%

revaluation

Key indexes:

Item Current Previous Change

Thomson 98.2 98.13 0.1

Reuters/HKEX

CNH index

Dollar index 93.872 93.898 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 6.387 0.13%

*

Offshore 6.4955 -1.41%

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 = 6.3947 Chinese yuan)