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[SHANGHAI] China's yuan firmed against the US dollar on Thursday as sliding US bond yields kept the greenback under pressure, though traders say talk of further falls in the Chinese currency may intensify over the short term.
Traders said the Chinese currency market was being "heavily" affected by volatility in the US dollar after the Lunar New Year holiday, with lingering caution about the outlook for the yuan keeping its upside contained.
The People's Bank of China set the yuan midpoint rate at 6.8710 per US dollar prior to market open, firmer than the previous fix at 6.8849.
The spot market opened at 6.8720 per US dollar and was changing hands at 6.8682 at midday, 33 pips firmer than the previous late session close and 0.04 per cent stronger than the midpoint.
The yuan fell 6.6 per cent against a surging US dollar in 2016, its biggest annual drop since 1994, amid a rush of capital from emerging markets, including China, on expectations of a higher pace of rate increases by the US Federal Reserve.
The slide in the currency prompted Beijing to effect a raft of measures to curb money moving out of China and, along with a recent broad drop in the US dollar, has helped stabilise the yuan over the past few weeks.
A trader at a Chinese bank said expectations of yuan depreciation may intensify if the offshore yuan reverts to trading at a discount to its onshore counterpart. Since the beginning of the year, the offshore yuan has been stronger than the onshore yuan, a reversal of the longer term trend.
"A stronger offshore spot is containing the onshore yuan from falling, but the gap is shrinking," the trader said.
The spread between onshore and offshore spot rates narrowed to around 200 pips on Thursday compared with a gap of around 300 pips a day earlier. It widened a 723-pip gap at the beginning of this month.
The offshore yuan was trading 0.25 per cent firmer than the onshore spot at 6.8512 per US dollar at midday.
The yuan exchange market largely ignored news earlier in the week that Chinese foreign exchange reserves fell below the closely watched US$3 trillion level in January.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.23, weaker than the previous day's 95.27.
The global US dollar index was steady at 100.29 from the previous close of 100.28, after being pressured overnight by falling US Treasury yields.
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 7.089, 3.08 per cent weaker than the midpoint.
One-year NDFs are settled against the midpoint, not the spot rate.