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Yuan retreats from March highs as dollar regains footing

The yuan eased from five-month highs on Thursday as the struggling greenback regained some ground on hopes U.S. lawmakers will soon agree to an economic stimulus package, taking a breather after two sessions of gains.

The onshore yuan softened 0.1% to 6.9429 per dollar by midday, while its offshore counterpart was flat at 6.9420, after reaching their firmest since March on Wednesday amid U.S. dollar weakness.

A gloomy outlook for the U.S. economy has kept the greenback near two-year lows. But signs of compromise among U.S. lawmakers for a fiscal stimulus helped it stabilise in Wednesday trade. The U.S. Treasury also said it would borrow $270 billion more than previously estimated.

Expectation that the dollar’s slide is bottoming out took some shine off the yuan, said two traders in Shanghai.

“The dollar has already weakened a lot, and the new fiscal stimulus may come in August, so it can’t go much lower from here,” said Xing Zhaopeng, market economist at ANZ in Shanghai.

Foreign investors trading A-shares through Hong Kong’s Stock Connect were net sellers on Thursday, according to data from the Hong Kong exchange. Shanghai shares fell 0.4%.

Trade tensions lurked in the background. U.S. and Chinese officials will review the implementation of their Phase 1 trade deal during an Aug. 15 video call, just as Washington steps up its campaign to purge Chinese apps.

“No one expects this meeting to ease the heightened tensions between the world’s two largest economies, not with the U.S. elections just three months away in November,” DBS analysts said in a note.

They see the yuan staying on the stronger side of that handle before Aug. 15.

Given the market’s low expectations on the outcome of themeeting, the traders said the yuan could firm and test 6.9 should the two sides show signs of commitment to the deal.

The People’s Bank of China set the midpoint at 6.9438 prior to market open, the strongest since March but close to the Reuters estimate of 6.9464.
The yuan market at 0402 GMT:

Item Current Previous Change
PBOC midpoint 6.9438 6.9752 0.45%

Spot yuan 6.9429 6.935 -0.11%

Divergence from -0.01%
Spot change YTD 0.29%
Spot change since 2005 19.21%

Key indexes:

Item Current Previous Change

Thomson 91.7 91.78 -0.1
CNH index
Dollar index 92.763 92.777 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.


Instrument Current Difference
from onshore
Offshore spot yuan 6.942 0.01%
Offshore 7.0872 -2.02%

*Premium for offshore spot over onshore
**Figure reflects difference from PBOC’s official midpoint, since non-deliverable forwards are settled against the midpoint.
Source: Reuters (Reporting by Noah Sin; Editing by Jacqueline Wong)

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