Chinese yuan on course for 3rd weekly gain, investors await third quarter GDP

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    SHANGHAI, Oct 15 (Reuters) - China's yuan inched higher
against the dollar on Friday and looked set for a third straight
weekly gain, as investors awaited key economic data due next
week for more clues on the  policy outlook.
    While growth momentum is clearly slowing, compounded by
recent widespread power shortages, traders said investors were
unwilling to make huge bets on either side of the yuan before
China's September and Q3 GDP data next Monday.
    Premier Li Keqiang said this week that China has ample tools
to cope with economic challenges despite slowing growth, and the
government is confident of achieving full-year development
goals.
    Prior to the market opening, the People's Bank of China
(PBOC) set the midpoint rate at 6.4386 per dollar, 28
pips firmer than the previous fix of 6.4414, the strongest since
Sept. 16.
    In the spot market, onshore yuan opened at 6.4350
per dollar and was changing hands at 6.4361 at midday, 43 pips
firmer than the previous late session close.
    If the yuan finishes the late night session at the midday
level, it would have gained 0.12% to the dollar for the week.
    Traders said slight strength in the yuan on Friday morning
came after the central bank fully rolled over maturing
medium-term loans, without adding more cash into the financial
system or adjusting the interest rate.
    The steady borrowing cost of medium-term lending facility
(MLF) eased market fears of a possible shrinkage in the yield
gap between China and the United States, said a trader at a
Chinese bank.
    A narrowing yield premium could prompt capital outflows from
China and add depreciation pressure on the yuan.
    Still, investors heatedly discussed whether the Chinese
central bank would further ease its monetary settings to support
the economy, with some citing risks of stagflation.
    "Bigger tranches of MLF maturity in Nov-Dec as well as tax
payments due could mean this is the right time for a broader
based reserve requirement ratio (RRR) cut, especially given the
weaker credit growth in September," analysts at Maybank said in
a note.
    A total of 1.95 trillion yuan worth of MLF loans are set to
expire in the rest of the year, and some market analysts expect
tax payment could hit 1.4 trillion yuan this month.
    "Despite weaker economic momentum, we expect the CNY’s
strength to carry on for longer, supported by continued strong
fundamentals and likely less confrontational relations between
the U.S. and China," analysts at Standard Chartered said in a
note.
    "Exports will likely stay at record highs, if not rise
further, in Q4, as indicated by a continued rise in shipping
container costs," they said, expecting the yuan to trade in a
range of 6.4 to 6.6 in the final three months of the year.
    U.S. Trade Representative Katherine Tai said on Thursday
that her talks with China's Vice Premier Liu He got off to a
"good start" last week and that she planned to raise Beijing's
non-compliance with Phase 1 trade deal in future discussions.

    By midday, the global dollar index fell to 93.94 from
the previous close of 94.041, while the offshore yuan
was trading at 6.435 per dollar. 

    The yuan market at 0401 GMT: 
    
    ONSHORE SPOT:
 Item               Current  Previous  Change
 PBOC midpoint      6.4386   6.4414    0.04%
                                       
 Spot yuan          6.4361   6.4404    0.07%
                                       
 Divergence from    -0.04%             
 midpoint*                             
 Spot change YTD                       1.43%
 Spot change since 2005                28.59%
 revaluation                           
 
    Key indexes:
     
 Item            Current     Previous  Change
                                       
 Thomson         100.02      100.03    0.0
 Reuters/HKEX                          
 CNH index                             
 Dollar index    93.94       94.041    -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    6.435     0.02%
        *                        
 Offshore              6.62      -2.74%
 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; Editing by Kim
Coghill)
  

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