China's yuan edges higher, all eyes on FOMC meeting

SHANGHAI, March 17 (Reuters) - China's onshore yuan inched higher against the U.S. dollar on Wednesday after the central bank set a slightly firmer daily fixing, but its strength was capped as investors awaited the outcome of a U.S. Federal Reserve policy meeting.

With the U.S. economy picking up steam, investors will be watching for any indications that the Fed could start raising rates earlier than it has previously indicated, which could support a stronger greenback. nL1N2L82OT

Traders said the outcome could prompt more market volatility, though the likelihood of a clear policy shift is low.

"The yuan is probably going to be directionless today. We'll have to wait and see how the market reacts to the Fed's decision and (Fed Chair Jerome) Powell's comments," said a trader at a foreign bank.

Before the open, the People's Bank of China set the midpoint rate of the yuan's daily trading band CNY=PBOC at 6.4978 per dollar prior, firmer than the previous fix of 6.5029.

Spot yuan CNY=CFXS opened at 6.5060 per dollar and edged up to 6.5025 around midday, 35 pips firmer than Tuesday's late session close.

The offshore yuan CNH=D3 was 10 pips weaker than the previous day's close at 6.5031 per dollar.

Analysts continue to expect the yuan to appreciate this year, though at a slower pace than 2020, when it appreciated 6.7%. Authorities have stepped up efforts to contain the yuan's rise, with the central bank purchasing its most foreign exchange in more than five years in February. nB9N2L100O

Sources with knowledge of the matter told Reuters on Tuesday that at least one major state-owned bank is conducting large currency swaps in the mainland China market, possibly as part of efforts to rein in the yuan. nL4N2LE3ID

Rising tensions between Beijing and Washington could also put a damper on the currency's rise.

U.S. officials said that Washington will take an uncompromising stance in talks with China on Thursday in Alaska, the first face-to-face meetings between U.S. and Chinese senior officials since U.S. President Joe Biden took office. nL4N2LE4AE

U.S. Secretary of State Antony Blinken has pledged to push back against Beijing's "coercion and aggression" including some of its territorial claims. nL1N2LD2YF

The yuan market at 4:06AM GMT:

ONSHORE SPOT:

Item	Current	Previous	Change
PBOC midpoint CNY=SAEC	6.4978	6.5029	0.08%
Spot yuan CNY=CFXS	6.5025	6.506	0.05%
Divergence from midpoint*	0.07%
Spot change YTD			0.40%
Spot change since 2005 revaluation			27.28%

Key indexes:

Item	Current	Previous	Change
Thomson Reuters/HKEX CNH index	96.89	96.9	0.0
Dollar index	91.908	91.873	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 morning.

OFFSHORE CNH MARKET

Instrument	Current	Difference from onshore
Offshore spot yuan CNH= *	6.5031	-0.01%
Offshore non-deliverable forwards CNY1YNDFOR= **	6.6808	-2.74%

*Premium for offshore spot over onshore CNY=CFXS

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. CNY=SAEC.

(Reporting by Andrew Galbraith and Jindong Zhang in Shanghai; Editing by Kim Coghill)

((Andrew.Galbraith@tr.com; +86 21 2083 0079; Reuters Messaging: andrew.galbraith.thomsonreuters.com@reuters.net ; Twitter: https://twitter.com/apgalbraith))