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Yuan advances to new 3-yr high as PBOC yet to show discomfort with recent gains

    SHANGHAI, May 27 (Reuters) - China's yuan advanced further
to a new three-year high against the dollar on Thursday, as
investors increased their bets on further strength in the
Chinese unit after the Chinese central bank appeared not to show
discomfort with recent gains.    
    Before market opening, the People's Bank of China (PBOC) set
the midpoint rate at 6.403 per dollar, 69 pips firmer
than the previous fix of 6.4099. 
    Traders and analysts said the market had been carefully
gauging the gap between their forecasts and the official
guidance rates after the yuan breached the psychologically
important 6.4 per dollar level this week to see whether the
central bank would start to rein in the currency's strength.
    If the midpoint was fixed on the weaker side of the market
consensus and showed huge forecast error, that could mean the
central bank was not happy with rapid gains this week to rise
across the key level, said a trader at a foreign bank.
    On Thursday, official fixing was 6 pips firmer than Reuters'
estimate of 6.4036.
    Absence of discomfort with yuan strength in the midpoint
fixing pushed the spot price higher. The onshore yuan
opened at 6.3935 per dollar and strengthened to a high of
6.3854, the strongest level since May 25, 2018. By midday, it
was changing hands at 6.3861, 54 pips firmer than the previous
late session close.
    "The biggest negative impact of yuan appreciation is to
reduce export competitiveness, but recovery of global supply is
still on the way," said Zhang Yu, chief analyst at Huachuang
Securities. "(Chinese) exports remain strong and bargaining
power is sufficient. The stronger yuan has not caused
significant damage to export competitiveness since the second
half of last year."
    Several traders said bullish bets on the yuan quickly grew,
as seen in the options market. One-month risk reversals for the
dollar against the yuan onshore, a gauge that
measures the premium paid for calls over puts, plunged to -0.35
this week, the lowest since January. A negative reading
suggested rising bets over yuan appreciation than depreciation.
    At midday, the global dollar index fell to 90.037
from the previous close of 90.073, while the offshore yuan
 was trading at 6.3794 per dollar. 
    
    The yuan market at 0401 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.403    6.4099    0.11%
                                       
 Spot yuan          6.3861   6.3915    0.08%
                                       
 Divergence from    -0.26%             
 midpoint*                             
 Spot change YTD                       2.23%
 Spot change since 2005                29.60%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         98.05       97.75     0.3
 Reuters/HKEX                          
 CNH index                             
 Dollar index    90.037      90.073    0.0
 
    
    
*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    6.3794    0.11%
        *                        
 Offshore              6.532     -1.97%
 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)
  
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