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Yuan climbs on vaccine progress but soft inflation caps gains

    SHANGHAI, Nov 10 (Reuters) - China's yuan firmed on Tuesday
as reports of vaccine progress boosted investor risk appetite
but gains were curbed by soft inflation data and the central
bank's attempt to reduce liquidity.
    Lifting global sentiment was news that Pfizer Inc's
experimental COVID-19 vaccine was more than 90% effective based
on initial trial results, a major victory in the war against a
pandemic.
    The People's Bank of China set the midpoint rate
at 6.5897 per dollar prior to market open, 226 pips firmer than
the previous fix of 6.6123 and its strongest level since June
27, 2018. 
    The spot market opened at 6.6175 per dollar and
was changing hands at 6.6058 at midday, 222 pips firmer than the
previous late session close.
    But gains in the yuan were capped by rising borrowing costs
in the interbank market, as some market participants interpreted
tighter liquidity as a sign of authorities' low tolerance for
fast rallies. As such, traders refrained from testing new highs
in the local unit.
    "The PBOC has drained cash from money market recently. It is
quite an obvious signal that the authorities are attempting to
ease the pace of yuan appreciation," said Ken Cheung, chief
Asian FX strategist at Mizuho Bank in Hong Kong. 
    The Shanghai Interbank Offered Rate (SHIBOR) for the
overnight tenor rose to 2.333% on Tuesday, the
highest level since Oct. 28.  
    The yuan rose to a more than 28-month high against an easing
dollar on Monday, underpinned by improving market sentiment as
investors welcomed Joe Biden's election as U.S. president.
 
    "The yuan's appreciation trend is yet to be over and it
probably would rise above 6.5 per dollar thanks to China's solid
economic fundamentals, historically high U.S.-China interest
rate spread and potential weakness in the greenback," CIB
Research said in a note. 
    The currency's climb on Tuesday was also contained by
downbeat inflation data. 
    China's factory-gate prices fell at a sharper-than-expected
pace in October, weighed by soft demand for fuel even as the
country's trade and manufacturing sectors staged impressive
recoveries from their COVID-19 slump.  
    China's new bank loans are expected to fall sharply in
October from the previous month, but are likely to be higher
than a year earlier, as the central bank maintains policy
support for the economy because of the global pandemic.
 
    The Thomson Reuters/HKEX Global CNH index, which
tracks the offshore yuan against a basket of currencies on a
daily basis, stood at 95.62, weaker than the previous day's
96.01.
    The global dollar index fell to 92.642 from the
previous close of 92.74. 
    The offshore yuan was at 6.5954 per dollar. 

    The yuan market at 0423 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.5897   6.6123    0.34%
                                       
 Spot yuan          6.6058   6.628     0.34%
                                       
 Divergence from    0.24%              
 midpoint*                             
 Spot change YTD                       5.41%
 Spot change since 2005                25.29%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         95.62       96.01     -0.4
 Reuters/HKEX                          
 CNH index                             
 Dollar index    92.642      92.74     -0.1
 
    
    
*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    6.5954    0.16%
        *                        
 Offshore              6.7652    -2.59%
 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, Jindong Zhang, Luoyan Liu and Andrew
Galbraith; Editing by Sam Holmes)
  
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