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China's yuan swings from gains to losses as sharp rally unnerves traders

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    SHANGHAI, Jan 5 (Reuters) - China's yuan swung from strong
gains to losses on Tuesday as a robust rise against the U.S.
dollar spooked traders and sparked profit-taking, a day after
its surging value prompted some market players to question their
forecasts for the currency.
    The yuan rose nearly 7% against the dollar in
2020, lifted by a wide yield advantage in Chinese debt over
other developed markets and the economy's rapid recovery from
the COVID-19 pandemic.
    Traders said that the yuan's strength on Monday - when it
clocked a 1% rise against the dollar - and early on Tuesday was
within forecasted ranges for the currency this year, but that
expectations had been for steady, gradual appreciation. The
sudden rise had thrown those expectations into disarray.
    On Tuesday morning, the People's Bank of China (PBOC) lifted
the onshore yuan's trading band by 648 pips, or 1%,
to 6.476 per dollar. 
    It was the biggest one-day lift in the yuan midpoint since
China abandoned a decade-old peg against the dollar in 2005, and
the strongest official guidance in more than 30 months.
    Spurred on by the fixing, spot yuan opened at
6.4601 per dollar and jumped to 6.4292 in the morning session,
its strongest since June 15, 2018. Its offshore counterpart
surged more than 0.6% to break through the 6.42 level and touch
6.4127 per dollar, also its firmest since mid-June 2018.
    "The PBOC's implicit tolerance of further RMB (yuan) rally
below 6.50 in the new year just reinforced the RMB buying flow,"
said Ken Cheung, chief Asian foreign exchange strategist at
Mizuho Bank. 
    He said that the New York Stock Exchange's decision to not
move forward with the delisting of Chinese telecommunication
giants also boosted the currency.
    But by midday, the onshore yuan's gains had vanished, with
the currency changing hands at 6.4622, just weaker than the
previous late session close. The offshore yuan trimmed its gains
and was trading at 6.443 per dollar.
    A trader at a foreign bank said the yuan's sharp rally had
unnerved market sentiment and prompted profit-taking, leading to
the sharp turnaround by midday. But the lack of resistance from
state banks or the PBOC to the rally suggested the currency
would resume its march higher.
    "Dollar-yuan short positions are too concentrated, but the
central bank is now definitely accepting of the yuan's continued
rise," said a trader at a Chinese bank.
    Cheung at Mizhuo said he expected the yuan to experience a
"modest rally" in 2021, in contrast to the wild swings of the
year's first trading sessions.
    While it could strengthen to the 6.3 level on China's strong
growth and the hefty yield premiums on yuan-denominated assets,
a vaccine could drag on its momentum as a wider global recovery
narrowed China's yield advantage, he said. 
    The global dollar index fell to 89.765 from the
previous close of 89.878. 

    The yuan market at 4:14AM GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.476    6.5408    1.00%
                                       
 Spot yuan          6.4622   6.462     0.00%
                                       
 Divergence from    -0.21%             
 midpoint*                             
 Spot change YTD                       7.75%
 Spot change since 2005                28.08%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         95.99       95.63     0.4
 Reuters/HKEX                          
 CNH index                             
 Dollar index    89.765      89.878    -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    6.443     0.30%
        *                        
 Offshore              6.5845    -1.65%
 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 Andrew Galbraith and Winni Zhou; Editing by
Christopher Cushing)
  

Our Standards: The Thomson Reuters Trust Principles.

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