China's yuan looks set for losing week as dollar jumps

SHANGHAI, March 10 (Reuters) - China's yuan extended losses against the dollar on Friday and looked set for a losing week as fears of further aggressive rate hikes from the U.S. Federal Reserve pressured the local currency. With the dollar index near a three-month high, traders were anxiously awaiting the U.S. nonfarm payrolls report later in the session for any more clues on the Fed's interest rate hike path following Chair Jerome Powell's hawkish rhetoric earlier this week. "If there's no downside surprise to the U.S. payrolls, the yuan is likely to breach 7 (to the dollar)," said a trader at a foreign bank, noting upbeat jobs data could support further monetary tightening in the world's largest economy, boosting the dollar and piling downward pressure on emerging currencies. Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate at 6.9655 per dollar, 11 pips firmer than the previous fix of 6.9666.

In the spot market, the onshore yuan opened at 6.9650 per dollar and was changing hands at 6.9677 at midday, 47 pips softer the previous late session close. If the yuan finishes the late night close at the midday level, it would have lost nearly 1% for the week. Markets have been closely monitoring the dollar's movements, traders said, as that could potentially push the yuan past the psychologically critical 7 per dollar level.

Markets have long considered that mark as a threshold, a breach of which could trigger stronger yuan depreciation expectations and risk capital outflows. Separately, traders said local market participants would shift their attention to the PBOC's medium-term policy loan operation next week for more clues on China's monetary policy stance. "We expect the PBOC to inject of 400 billion yuan ($57.42 billion) via the medium-term lending facility (MLF) next week at 2.75% so that overall liquidity will remain balanced," analysts at ANZ said in a note. A batch of 200 billion yuan worth of MLF loans is due to expire next Wednesday. Meanwhile, the PBOC made its biggest weekly cash withdrawal in more than two months this week after liquidity conditions loosened at the start of the month, even as some market participants expect a reduction to banks' reserve requirements (RRR) soon. China will release February credit data between March 10 and March 15, with new yuan loans expected to fall from a record high in January partly due to seasonal factors, a Reuters poll showed, even as the central bank keeps policy accommodative to support a nascent economic recovery. At midday, the global dollar index stood at 105.19, while the offshore yuan was trading at 6.977 per dollar.

The one-year forward value for the offshore yuan traded at 6.7913 per dollar, implying a 2.73% appreciation within 12 months.

The yuan market at 0401 GMT:

ONSHORE SPOT: Item Current Previous Change PBOC midpoint 6.9655 6.9666 0.02% Spot yuan 6.9677 6.963 -0.07% Divergence from 0.03%
midpoint*
Spot change YTD -0.97% Spot change since 2005 18.78% revaluation

Key indexes:
Item Current Previous Change

Dollar index 105.19 105.309 -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 6.977 -0.13%
*
Offshore 6.7848 2.66% 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 Brenda Goh; Editing by Kim Coghill)

Messaging: winni.zhou.thomsonreuters.com@reuters.net))