July 15, 2020 / 5:03 AM / 23 days ago

China's yuan firms on weaker dollar but renewed Sino-U.S. worries cap gains

    SHANGHAI, July 15 (Reuters) - China's yuan firmed on
Wednesday on dollar weakness overnight and a stronger fixing,
but trimmed early gains as tensions between Washington and
Beijing ratcheted higher over national security legislation in
Hong Kong.
    Worsening diplomatic frictions weighed on the spot yuan
, which opened at 6.9920 per dollar after the People's
Bank of China (PBOC) set its daily midpoint rate at
6.9982 per dollar, firmer than the previous fix of 6.9996.
    By midday, the currency was changing hands at 7.0028, just
47 pips stronger than Tuesday's late session close. Its offshore
counterpart was also stronger at 7.0046 per dollar. 
    U.S. President Donald Trump on Tuesday signed an executive
order to end Hong Kong's special status under U.S. law to punish
China for what he called "oppressive actions" in the city, and
signed into law a bill to penalize banks doing business with
Chinese officials who implement the city's new security law.

    China's foreign ministry said on Wednesday that Beijing
would impose retaliatory sanctions.
    The increase in Sino-U.S. tensions follows a spat over
China's disputed claims in the South China Sea, which helped
drive the yuan to its biggest daily drop against the dollar in
three weeks on Tuesday.
    The yuan was nevertheless set for a firmer session after the
U.S. dollar weakened overnight on news of a rise in U.S.
inflation and progress in the development of a vaccine against
the novel coronavirus.
    A trader at a Chinese bank said that a stronger euro and
weaker dollar pushed the yuan to open firmer, but that dollar
demand was strong below the 7 yuan-per-dollar level. 
    The trader said that risks in the Sino-U.S. relationship
offset cautious market expectations for yuan appreciation based
on flows into China's stock market, which has experienced a bull
run in recent weeks, and widening spreads between Chinese and
U.S. yields.
    "Right now everyone is worried about Sino-U.S. relations,
it's impossible to predict if the tensions will rise further and
this is a risk for the yuan," said another trader at a foreign
bank.     
    Lifted by the rising risk aversion, the global dollar index
 rose to 96.228 on Wednesday from the previous close of
96.154. 
    
    The yuan market at 3:48AM GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.9982   6.9996    0.02%
                                       
 Spot yuan          7.0028   7.0075    0.07%
                                       
 Divergence from    0.07%              
 midpoint*                             
 Spot change YTD                       -0.57%
 Spot change since 2005                18.19%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         92.49       92.51     0.0
 Reuters/HKEX                          
 CNH index                             
 Dollar index    96.228      96.154    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    7.0046    -0.03%
        *                        
 Offshore              7.139     -1.97%
 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 Jindong Zhang; editing by
Richard Pullin)
  
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