Yuan eases after China tweaks fixing formula to rein in strength

    SHANGHAI, Oct 28 (Reuters) - The yuan eased against the
dollar on Wednesday after some banks tweaked a methodology for
fixing the yuan's daily midpoint, a fresh sign that Beijing may
be attempting to slow the pace of the rally in the Chinese
    The yuan has gained more than 6% against the dollar since
late May, underpinned by improving economic fundamentals and
rising capital inflows. But a currency that strengthened too
much could hurt Chinese exporters.
    Chinese banks have suspended the use of a counter-cyclical
factor in the fixing formula, a tool used to influence the value
of the yuan, the country's currency trading system said on
    Analysts said the latest move suggested Beijing policymakers
might want to see two-way volatilities in the yuan. The
counter-cyclical factor, first introduced in 2017 and meant to
reduce price swings, tended to be asymmetric and was mostly
deployed to counter depreciation pressure, rather than
appreciation pressure.
    "(Suspending the use of the factor) won't divert the yuan's
long-term broad trend and direction," said a trader at a foreign
bank, expecting the market to take a breather from its rally to
digest the policy signal before resuming appreciation.
    In the spot market, onshore yuan opened at 6.7140
per dollar and was changing hands at 6.7094 at midday, 49 pips
weaker than the previous late session close.
    Prior to market opening, the People's Bank of China (PBOC)
set the midpoint rate at a near two-week low of
6.7195 per dollar, 206 pips or 0.3% weaker than the previous fix
of 6.6989. 
    Several traders said the market was not too surprised at the
tweaks in the fixing formula, as many had already muted the
counter-cyclical factor in their own fixing models.
    Zhou Hao, an economist at Commerzbank, noted this was the
second time this month that Chinese authorities have rolled out
measures to curb the yuan's appreciation. 
    "The removal of the counter-cyclical factor, from a pure
technical perspective, should have very small impact on USD/CNY
fixing rates," he said in a note.
    "Therefore, it appears that the rapid CNY appreciation
particularly against the currency basket is not favoured by the
authorities. That said, the CNY index is likely to see some
moderation in the foreseeable future, but the spot USD/CNY rates
will be still dependent on the economic and dollar outlook."
    Earlier this month, the PBOC lowered the reserve requirement
ratio for financial institutions when conducting some foreign
exchange forwards trading to zero earlier this month. The move
effectively lowered the cost of shorting the yuan. 
    The global dollar index fell to 93.128 at midday,
when the offshore yuan traded at 6.7075 per dollar. 

    The yuan market at 0400 GMT: 
 Item               Current  Previous  Change
 PBOC midpoint      6.7195   6.6989    -0.31%
 Spot yuan          6.7094   6.7045    -0.07%
 Divergence from    -0.15%             
 Spot change YTD                       3.78%
 Spot change since 2005                23.36%
    Key indexes:
 Item            Current     Previous  Change
 Thomson         94.61       94.65     0.0
 CNH index                             
 Dollar index    93.128      93.142    0.0
*Divergence of the dollar/yuan exchange rate. A 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 the official midpoint rate it sets each

 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.7075    0.03%
 Offshore              6.8767    -2.29%
*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
Kenneth Maxwell)