(Adds analysts' comments, swap points; updates prices) SHANGHAI, Oct 12 (Reuters) - The yuan retreated from a 17-month high on Monday after the central bank cut foreign exchange forward reserve requirements, but losses were contained as some corporate clients took advantage of the yuan weakness to trim their dollar positions. Over the weekend, the People's Bank of China (PBOC) announced it would lower to zero from 20% the reserve requirement ratio for financial institutions when conducting some foreign exchange forwards trading, with effect from Monday. The reduction, which effectively lowers the cost of shorting the Chinese currency, came after a recent sharp rally in the yuan. "The relaxation likely signals the PBOC's discomfort of the rapid appreciation of CNY recently," Goldman Sachs said in a note. The onshore spot yuan opened at 6.7268 per dollar, and eased to a low of 6.7310 and was fetching 6.7204 at midday, 272 pips weaker than the previous late session close. The spot yuan posted its biggest one-day gain since 2005 on Friday. Its offshore counterpart weakened to a low of 6.7509 in early Asian trade before settling at 6.7165 per dollar by midday. While market participants rushed to liquidate their long yuan positions to stem losses, dragging the spot rate weaker, some banks recommended to their corporate clients to take advantage of the pullback in the yuan to sell their existing dollars as they expected the yuan to resume its appreciation in mid- to long-term. "The current situation is different from 2017, as economic fundamentals, market sentiment and rate differentials (between China and other major economies) all support a stronger yuan," said a trader at a Chinese bank. 2017 was the last time the PBOC lowered the risk reserves requirements to zero before re-introducing it in 2018. Some analysts said the PBOC had adjusted the risk reserve requirements multiple times over the past few years to contain strong one-way bets and rapid moves in the yuan. "While markets will take notice of this move by the PBOC, we do not necessarily see it as a signal that they are uncomfortable with the recent gains," said Khoon Goh, head of Asia research at ANZ in Singapore. "The fixings this week will be more important in that regard. If the fixings are consistently on the weaker side of expectations that would be a sign that they would like a pause to the yuan strength." On Monday, the PBOC set the midpoint rate at 6.7126 per dollar prior to market's open, the strongest since April 23, 2019, but it was still much weaker than market projections. Separately, the PBOC's risk reserve move also prompted rising hedging demand from foreign investors and drove swap points higher in forwards market. The one-year dollar/yuan swap points hit 1,675 points on Monday morning, the loftiest level since November 2017. The yuan market at 0400 GMT: ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.7126 6.7796 1.00% Spot yuan 6.7204 6.6932 -0.40% Divergence from 0.12% midpoint* Spot change YTD 3.61% Spot change since 2005 23.15% revaluation Key indexes: Item Current Previous Change Thomson 94.62 95.03 -0.4 Reuters/HKEX CNH index Dollar index 93.088 93.113 0.0 *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 6.7165 0.06% * Offshore 6.8778 -2.40% 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 Shri Navaratnam and Muralikumar Anantharaman)
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