Yuan up on tight liquidity, set for worst month since August 2019

    SHANGHAI, June 30 (Reuters) - China's yuan edged up on
Wednesday underpinned by tighter cash conditions, but a rebound
in the U.S. dollar has set the currency on course for its
biggest monthly drop since August 2019.
    Prior to market opening, the People's Bank of China (PBOC)
set the midpoint rate at 6.4601 per dollar, 34 pips
weaker than the previous fix of 6.4567.  
    In the spot market, onshore yuan opened at 6.4625
per dollar and was changing hands at 6.4571 at midday, 69 pips
firmer than the previous late session close.
    If the yuan finishes the late night session at the midday
level, it would have lost 1.33% to the dollar for the month,
snapping two months of gains and posting the worst monthly
performance since August 2019.
    Some traders said onshore and offshore yuan liquidity showed
signs of tension on Wednesday morning, as seen from rises in
short-term borrowing costs. Banks have to shore up cash for
month-end demand and certain administrative requirements. Such
tightness supported the yuan.
    The CNH Hong Kong Interbank Offered Rate benchmark (CNH
HIBOR) for overnight tenor jumped to 9.741%, the
highest since June 1, 2017, while in the onshore interbank
market, the overnight repo surged to a high of 4%
in morning trade, the firmest since Feb.1. 
    Meanwhile, temporarily closures of some major state-run
banks in Beijing ahead of 100th anniversary celebrations of the
Chinese Communist Party on July 1 had thinned trade volumes and
liquidity, traders said, amplifying market volatility.
    A trader at a Chinese bank said investors were unwilling to
take large bets partly due to the celebrations, along with
concerns over a major U.S. job report due on Friday that could
affect the Federal Reserve's policy projections.
    Separately, some analysts expect more two-way volatility in
the yuan in the second half of the year against the backdrop of
an uneven domestic economic recovery.
    "The issue of uneven domestic recovery may persist in the
next few quarters," said Marco Sun, chief financial market
analyst at MUFG Bank, expecting the yuan to trade between 6.44
and 6.48 per dollar in the near term.
    Recent data also showed a moderation in China's economic
recovery in June. Factory activity dipped to a four-month low in
June on higher raw material costs, a shortage of semiconductors
and a COVID-19 outbreak in Guangdong.
    By midday, the global dollar index fell to 92.041
from the previous close of 92.066, while the offshore yuan
 was trading at 6.4622 per dollar. 
    The yuan market at 0414 GMT: 
 Item               Current  Previous  Change
 PBOC midpoint      6.4601   6.4567    -0.05%
 Spot yuan          6.4571   6.464     0.11%
 Divergence from    -0.05%             
 Spot change YTD                       1.10%
 Spot change since 2005                28.18%
    Key indexes:
 Item            Current     Previous  Change
 Thomson         97.96       97.95     0.0
 CNH index                             
 Dollar index    92.041      92.066    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

 Instrument            Current   Difference
                                 from onshore
 Offshore spot yuan    6.4622    -0.08%
 Offshore              6.6276    -2.53%
*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; Editing by
Jacqueline Wong)