Yuan starts 2021 with brisk gains as traders clear key hurdles

    SHANGHAI, Jan 4 (Reuters) - The yuan leapt nearly 1% against
the dollar on the first trading day of the year on Monday, its
biggest daily gain in about three months and breaching a key
technical barrier that analysts say could extend last year's
strong gains.
    The onshore yuan strengthened 6.7% in 2020,
booking its first annual rise in three years, as a weaker U.S.
dollar, a widening yield gap between China and the United States
and effective coronavirus containment in the world's
second-largest economy supported the Chinese unit.
    Prior to market opening, the People's Bank of China (PBOC)
set the midpoint rate at 6.5408 per dollar, 159 pips
or 0.24% weaker than the previous fix of 6.5249.
    In the spot market, the onshore yuan opened at
6.5195 per dollar and jumped to a high of 6.4670 at one point,
its strongest level since June 20, 2018.
    By midday, the yuan was at 6.4702, 581 pips firmer than the
previous late session close on Dec. 31 and marching towards its
best day since Oct. 9, 2020.
    The currency also appears to have overcome immediate
concerns about official efforts to curb any rally past key
thresholds.
    A trader at a Chinese bank said the yuan faced some
resistance at 6.52 per dollar late last year, but once that was
cleared, dollar selling accelerated.
    "The USD/CNH breached the 6.5000 support early this morning,
with onshore USD/CNY also catching up on the decline," Terence
Wu, strategist at OCBC Bank in Singapore, said in a note. 
    "On a more structural basis, a further tilt towards 6.3000
cannot be ruled out if the current trends persist."
    Last week, China's major state-owned banks were seen buying
dollars at the rate of about 6.52 yuan, considered an effort to
keep the local currency from rising too fast.
    Some traders expect increased corporate dollar selling to
kick in during the run up to the Lunar New Year when companies
usually need more local currency to make various payments, which
should drive the yuan higher.
    Separately, upbeat manufacturing indicators have also lent
support for the yuan.
    "China will maintain its pro-growth stance at least until
the April politburo meeting that aims to discuss the current
economic situation  while  deploying  near-term  economic 
work," Gao Qi, strategist at Scotiabank in Singapore, said in a
note.
    In addition, China's decision to cut the weighting of the
U.S. dollar in the CFETS index basket could push the yuan's
value higher against its peers this year, some analysts said.

    The global dollar index fell to 89.693 at midday,
when the offshore yuan was trading at 6.4518 per
dollar. 
    
    The yuan market at 0402 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.5408   6.5249    -0.24%
                                       
 Spot yuan          6.4702   6.5283    0.90%
                                       
 Divergence from    -1.08%             
 midpoint*                             
 Spot change YTD                       7.62%
 Spot change since 2005                27.92%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         95.48       95.08     0.4
 Reuters/HKEX                          
 CNH index                             
 Dollar index    89.693      89.759    -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% from official midpoint rate it sets each
morning.

    OFFSHORE CNH MARKET   
  
 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.4518    0.29%
        *                        
 Offshore              6.6036    -0.95%
 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 Galbraith; Editing by Sam
Holmes)