[SHANGHAI] China's yuan firmed against the US dollar on Wednesday, after the central bank set its official guidance at a new seven-month high, but corporate demand for the greenback was seen curbing gains.

The People's Bank of China set its daily midpoint higher for the sixth straight trading session to 6.7858 per US dollar, its strongest level since Nov 9.

Wednesday's midpoint was 76 pips, or 0.11 per cent, firmer than the previous fixing at 6.7934, reflecting broad weakness in the US currency.

Firmer fixings highlighted a sudden shift by the authorities to step up support for the currency, a move that has gathered pace since May 24, when Moody's Investors Service downgraded its sovereign credit rating for China for the first time since 1989.

Last week was the yuan's best week since February 2016, as it gained 0.65 per cent against the US dollar - a sizable leap for a currency that normally trades in a wafer-thin range.

In the spot market, the yuan opened at 6.7950 per US dollar and was changing hands at 6.7930 at midday, 15 pips firmer than the previous late session close but 0.11 per cent weaker than the midpoint.

Traders said corporate demand for dollars remained strong on Wednesday, as June is the typical peak period for US dollar demand at both foreign and domestic companies.

Foreign firms usually start to repatriate profits overseas in June and domestic firms begin to purchase US dollars to square books ahead of the quarter-end.

Some market participants said the recent surge in the yuan against the US unit might have come to an end, and they were looking for direction on the yuan's trend in the near term.

The market is anxiously waiting for China's May foreign exchange reserves data due later on Wednesday, for signs of any pressure from capital outflows.

A Reuters poll suggested foreign exchange reserves may have risen by US$10 billion to US$3.04 trillion last month.

In the offshore market, offshore spot yuan traded 0.35 per cent firmer than its onshore counterpart at 6.7693 per US dollar.

Yuan borrowing costs in Hong Kong fell to normal levels after liquidity tightness eased, but the one-week rate remained slightly higher, suggesting market participants were willing to pay higher premiums for offshore yuan funding to cover uncertainties in global markets the following week.

A trader at a Chinese bank said uncertainties from Britain's general election and European Central Bank policy decision on Thursday, and the Federal Reserve's monetary policy meeting next week, might bring some volatility to the yuan.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 94.38, weaker than the previous day's 94.4.

The global dollar index rose to 96.662 from the previous close of 96.636.

Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.952, 2.39 per cent weaker than the midpoint.

One-year NDFs are settled against the midpoint, not the spot rate.

REUTERS