Yuan climbs to 3 years, investors wary of PBOC pressure

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    SHANGHAI, May 25 (Reuters) - China's yuan jumped to a near
three-year high against a weaker dollar on Tuesday, although
investors are now gauging the central bank's tolerance for a
firmer currency before chasing new highs.
    The onshore yuan opened at 6.4110 per dollar and
jumped to a high of 6.4030, the strongest level since June 2018
and a tad below the psychologically important 6.4 per dollar
level.
    By midday, it was changing hands at 6.4117, 83 pips firmer
than the previous late session close.
    "The RMB still sees the firmest appreciation pressure, and
this translates to the 6.4000 being still in the spotlight,"
strategists at OCBC Bank said in a note.
    Several traders said the yuan's strength reflected the
greenback's overnight weakness following softer-than-expected
U.S. data and affirmations from Federal Reserve officials that
policy would stay on hold.
    But the onshore spot yuan was stuck at around 6.41 per
dollar level after leaps in initial trade as investors worried a
too rapid rise in the currency could prompt state-run banks to
step in to rein in strength.
    Rapid yuan moves in either direction are not ideal for the
central bank, said a trader at a Chinese bank.
    Many analysts and economists said a too strong yuan could
hurt the country's exporters despite external trade remaining
resilient in the first quarter of this year.
    "In our view, the People's Bank of China (PBOC) is aware of
the RMB appreciation risk given slowing China (economic) growth
momentum in Q1 and still uneven recovery," said Ken Cheung,
chief Asian FX strategist at Mizuho Bank in Hong Kong.
    "The CNY fixings in coming days will be monitored for any
PBOC FX policy guidance."
    Markets believed that the official midpoint fixing is one of
the key signals showing authorities' attitude toward the yuan's
levels. Prior to market opening on Tuesday, the PBOC set the
midpoint rate at 6.4283 per dollar, 125 pips or 0.19%
firmer than the previous fix of 6.4408. It was 23 pips weaker
than Reuters' estimate of 6.426.
    The PBOC over the weekend urgently reiterated no change to
the currency policy after comments from central bank researchers
that had unnerved the market.
    One researcher felt China should free up the exchange rate
over time to support wider global adoption of the currency,
while another said the exchange rate target could be dropped to
allow further strengthening to offset rising commodity prices.
    The offshore yuan also followed its onshore
counterpart's appreciation in morning trade to test the key 6.4
per dollar level. It jumped to a high of 6.4010 before trading
at 6.406 per dollar as of midday.
    The global dollar index fell to 89.759 at midday from
the previous close of 89.855.
    
    The yuan market at 0400 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.4283   6.4408    0.19%
                                       
 Spot yuan          6.4117   6.42      0.13%
                                       
 Divergence from    -0.26%             
 midpoint*                             
 Spot change YTD                       1.82%
 Spot change since 2005                29.08%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         97.53       97.33     0.2
 Reuters/HKEX                          
 CNH index                             
 Dollar index    89.759      89.855    -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    6.406     0.09%
        *                        
 Offshore              6.566     -2.10%
 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 Sam
Holmes)
  

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