China's yuan briefly hits 1-1/2-week high then sinks into the red

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SHANGHAI (Reuters) - The yuan briefly touched a 1-1/2-week high against the dollar before giving back all the gains by midday on Thursday as Chinese cities tightened curbs against growing COVID outbreaks, adding to pressure on the economy.

The yuan has had a roller-coaster ride this week, falling to a near 15-year low on Tuesday before bouncing to book sharp gains in a day after, as cautious traders and companies raced to liquidate long dollar positions following state bank dollar selling to prop up the local unit.

Prior to the market opening on Thursday, the People's Bank of China (PBOC) set the midpoint rate at 7.1570 per dollar, 68 pips firmer than the previous fix 7.1638.

Traders and analysts said the midpoint came in line with market projections and effectively guided the spot prices closer to the official guidance rate. Thursday's fixing was 3 pips firmer than Reuters' estimate of 7.1573.

The official midpoint "helped to stabilise sentiment and reaffirmed the view that disorderly or one-off sharp adjustment is not what the Chinese policymakers want," Christopher Wong, FX strategist at OCBC Bank, said in a note.

The onshore yuan opened at 7.1632 per dollar and strengthened to a high of 7.16 at one point, the strongest level since Oct. 18. But by midday, it was changing hands at 7.2165, 455 pips or 0.6% weaker than the previous late session close.

"While the panic selling in RMB and Chinese assets appears to be over, we expect the CNH and CNY spot to enter a range-trading mode between 7.1 and 7.3 in the short term and the USD movement as well as updates on China policy roadmap under new leadership will be the key driver for the RMB," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

Some traders and analysts said yuan sentiment early in the day also got a boost from mounting market expectations that the U.S. Federal Reserve will tone down its aggressive stance on interest rate hikes, which prompted a pullback in the dollar.

[FRX/]

Moreover, companies usually have higher yuan demand for various payments heading into the year-end.

Households and companies also have started to settle their FX receipts after getting hold of such conversions for better prices, according to some currency traders, noting the conversions could provide additional support for the local unit.

However, the struggling economy is likely to continue to pressure the yuan, some analysts said.

"The medium-term uptrend (in USD/RMB) remains in place given China's economic headwinds, but the authorities will continue to strive to manage the move," said Alvin Tan, head of Asia strategy at RBC Capital Markets.

The economy rebounded at a faster-than-anticipated clip in the third quarter, but a more robust revival in the longer term will be challenged by persistent COVID-19 curbs, a deep property slump and global recession risks.

China on Thursday reported a third straight day of more than 1,000 new COVID cases nationwide, a modest tally compared with the tens of thousands per day that sent Shanghai into a full-blown lockdown earlier this year but enough to trigger more curbs and restrictions across the country.

Cities from Wuhan in central China to Xining in the northwest are doubling down on COVID-19 curbs, sealing up buildings, locking down districts and throwing millions into distress in a scramble to halt widening outbreaks.

In another worrying sign, data showed profits at big industrial firms fell at a faster clip in the January-September period.

By midday, the global dollar index stood at 109.769, while the offshore yuan was trading at 7.2313 per dollar.

The yuan market at 0401 GMT:

ONSHORE SPOT:

Item Current Previous Change

PBOC midpoint 7.157 7.1638 0.10%

Spot yuan 7.2165 7.171 -0.63%

Divergence from 0.83%

midpoint*

Spot change YTD -11.94%

Spot change since 2005 14.69%

revaluation

Key indexes:

Item Current Previous Change

Thomson 0.0

Reuters/HKEX

CNH index

Dollar index 109.769 109.7 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 * 7.2313 -0.20%

Offshore 7.077 1.13%

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..