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[SHANGHAI] China's yuan rose against a subdued US dollar in light trading on Monday after the central bank set a firmer official midpoint than markets had expected, traders said.
The People's Bank of China set the midpoint rate at 6.8606 per US dollar prior to market open.
While that was weaker than the previous fix of 6.8556, traders said it was around 400 pips firmer than expected.
Several traders and analysts said the central bank had fixed stronger midpoints than their models had suggested on Monday and last Friday, in a bid to help the market digest huge US dollar purchases by banks clients after the long Lunar New Year holiday.
In the spot market, the yuan opened at 6.8665 per US dollar and was changing hands at 6.8577 at midday, 150 pips firmer than the previous late session close and 0.04 per cent stronger than the midpoint.
"The spot market was very light today, I guess we will have to wait another week for most traders to come back," said a dealer at a foreign bank in Shanghai.
"In the mean time, the market is also waiting for clear signs of yuan movement for this year given uncertainties in the US dollar overseas," the trader added.
The greenback has remained relatively soft in recent sessions due to perceptions that US President Donald Trump may have a preference for a weaker US dollar, traders said.
A gauge of US dollar strength against six other currencies fell to 99.697 from the previous close of 99.868. It posted its worst January in percentage terms in 30 years.
The latest China Foreign Exchange Trade System (CFETS) data showed that the index for the yuan's value based on the market's trade-weighted basket stood at 94.03 on Friday, down 0.19 or 0.2 per cent from previous week's reading of 94.22.
Tommy Xie, a Singapore-based economist at OCBC Bank, said the slight drop in the CFETS index compared with a broad fall in the US dollar during the same period, suggesting that "the PBOC may try to stabilise the RMB index".
"The stronger-than-expected RMB fixing helped slow down the decline of RMB index due to the weaker dollar index," he added.
The spread between onshore and offshore yuan was still wide at around 500 pips, with the offshore spot trading 0.80 per cent firmer at 6.8033 per US dollar.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.53, weaker than the previous day's 95.58.
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 7.082, 3.13 per cent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.