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China's yuan firms, but gains capped by corporate US dollar purchase

[SHANGHAI] China's yuan firmed slightly against the US dollar on Wednesday, but gains were capped as a firmer midpoint eclipsed by rising corporate demand for the greenback in morning trade.

The Chinese currency moved sharply than usual on Tuesday, at one point strengthening enough for 2017's gains to more than erase last year's losses.

The year-to-date gains now stand at around 6.32 per cent, compared with the roughly 6.5 per cent loss notched in 2016.

Prior to market opening, the People's Bank of China raised its official yuan midpoint for the eighth straight session to 6.5311 per US dollar, the strongest level since May 18, 2016.

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The winning streak of the fixing was the longest in nearly two years, when the PBOC also lifted its official guidance for eight straight days in late September 2015.

Wednesday's midpoint was 59 pips, or 0.09 per cent, firmer than the previous fix of 6.5370 per US dollar on Tuesday.

In the spot market, the yuan opened at 6.5280 per US dollar and was changing hands at 6.5335 at midday, 15 pips stronger than the previous late session close but 0.04 per cent softer than the midpoint.

Rising corporate purchase of the greenback dragged the spot yuan rate lower than the guidance rate, traders said.

A trader at a Chinese bank in Shanghai said supply and demand for the US dollar were "balanced" in morning trade on Wednesday, different from one-way dollar sales seen in the pervious sessions.

"We expect the yuan to consolidate for a while with the 6.50 mark serving as a support for now," said Gao Qi, FX strategist at Scotiabank in Singapore.

Traders also pointed out that some investors have started to worry the authorities may control the pace of appreciation in the Chinese currency amid its rapid gains.

Yuan, usually traded in a wafer-thin range, has strengthened nearly 2,000 pips since the beginning of August.

For daily guidance rates and market performance, some market participants believe the authorities are maintaining a neutral attitude towards recent gains in the yuan. But some said official guidance on some days came in weaker than their models had suggested.

Market watchers expect the recent strong momentum in the Chinese currency would likely be maintained before the once-every-five-years congress of the Communist Party, which starts Oct 18.

The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.1, firmer than the previous day's 96.09.

The global US dollar index rose to 92.326 from the previous close of 92.252.

The offshore yuan was trading 0.21 per cent weaker than the onshore spot at 6.547 per US dollar.

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 6.687, 2.33 per cent weaker than the midpoint.

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