China raises yuan mid-point most in 15 months, spurs dollar buying

SHANGHAI (Reuters) - China's central bank raised its daily guidance rate for the yuan by the most in nearly 15 months on Tuesday as part of its latest move to put a floor under the currency as a trade war with the United States grinds on.

But the near 0.7 percent jump in the official mid-point fixing sparked more corporate demand for cheaper dollars, capping the yuan's gains in the spot market.

The People's Bank of China (PBOC) confirmed market suspicions on Friday by announcing it had started changing the way it calculates the mid-point in August, in a sign authorities are growing wary of letting the yuan weaken further after a record 10 straight weeks of losses.

But market watchers say the yuan will continue to face depreciation pressure as the Sino-U.S. trade battle deepens and China continues to ease policies to support its cooling economy.

Prior to the market opening on Tuesday, the PBOC lifted its official yuan midpoint to 6.8052 per dollar, 456 pips, or 0.67 percent, firmer than the previous fix of 6.8508 and largely matching market forecasts.

The move in Tuesday's official guidance rate was the biggest one-day strengthening in percentage terms since June 1, 2017.

The guidance rate was 4 pips lower than Reuters' estimate of 6.8048 per dollar.

Market watchers believe the re-introduction of the mysterious "counter-cyclical factor" in the PBOC's calculations is largely aimed at steadying the currency, not turning it around.

"It does not make sense to see a much stronger CNY from both the economic and trade war perspectives. In our view, the CNY's weakness is justified as the economy is still struggling between growth, debt and leveraging," Zhou Hao, analyst at Commerzbank (DE:CBKG) in Singapore said in a note.

Recent easing measures in monetary policy also imply a weaker bias for the currency, he said, and added it would not be in China's interest to engineer a firmer yuan while the U.S. trade dispute drags on.

In the spot market, the onshore yuan opened at 6.8128 per dollar and quickly fell into negative territory. As of 0232 GMT, the onshore yuan traded at 6.8185, 25 pips weaker than the previous late session close.

Its offshore counterpart was trading at 6.8051 per dollar as of 0232 GMT.

Bargain hunting for cheaper dollars remained strong, traders said, as many consider 6.8 per dollar as a hurdle for now.

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In global markets, the dollar steadied after falling to a four-week low overnight, as after the United States and Mexico agreed to overhaul the North American Free Trade Agreement, boosting optimism for an easing of global trade tensions.