Chinese yuan drops as domestic coronavirus cases rise

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    SHANGHAI, Aug 3 (Reuters) - China's yuan weakened on Tuesday
as a surge of coronavirus cases of the Delta variant in the
country prompted tough measures including mass testing, fuelling
worries over the potential economic impact of the new
restrictions.
    "There appears to be a lot of uncertainty around this round
of infections. Overall sentiment may turn toward risk aversion,"
said a trader at a foreign bank, adding that in the near term
the yuan is likely to remain range-bound.
    On Tuesday, China reported 90 new confirmed COVID-19 cases
in the mainland for Aug. 2. While that was down from 98 a day
earlier, the number of locally transmitted infections rose to 61
from 55 cases a day earlier.
    The central city of Wuhan, where the virus causing COVID-19
first surfaced in late 2019, announced mass testing of all
residents following the detection of three domestically
transmitted cases in the city. 
    The rise of Delta variant infections poses economic risks
and fresh challenges for authorities who have for months managed
to avert any widespread outbreak of the coronavirus.

    "It will bear watching whether more downside risks
to economic fundamentals will arise, thus triggering further
monetary policy easing and creating room for the short end of
the yield curve to fall," Mary Xia, China rates market analyst
at UBS Securities, said in a note.
    Before the market open, the People's Bank of China set the
yuan's daily midpoint rate at 6.461 per dollar,
slightly firmer than the previous fix of 6.466. 
    Spot yuan opened at 6.4624 per dollar and was
changing hands at 6.4652 at midday, 32 pips softer than Monday's
late session close. The offshore yuan was slightly
weaker at 6.4657 per dollar.        
    Apart from rising local virus cases, analysts and traders
said they continue to watch the U.S. dollar index for guidance
on the yuan's direction. Like the yuan, the greenback has been
hit by rising concerns over the spread of the Delta variant. 
    On Tuesday, the dollar index was barely changed at
92.045 as U.S. yields remained low, a day after an Institute for
Supply Management (ISM) report showed July U.S. manufacturing
growth slowed for the second straight month.
    But analysts at China Construction Bank said that the
dollar-yuan pair could pull back toward the end of
the year, while increased export orders and capital inflows into
Chinese bonds could support the yuan. 

    The yuan market at 4:02AM GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.461    6.466     0.08%
                                       
 Spot yuan          6.4652   6.462     -0.05%
                                       
 Divergence from    0.07%              
 midpoint*                             
 Spot change YTD                       0.98%
 Spot change since 2005                28.02%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         98.33       98.43     -0.1
 Reuters/HKEX                          
 CNH index                             
 Dollar index    92.045      92.044    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    6.4657    -0.01%
        *                        
 Offshore              6.6455    -2.78%
 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 in Shanghai and Xiao Han in
Beijing; Editing by Jacqueline Wong)
  

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