China's yuan jumps to 1-1/2-month high as carry trades unwind

SHANGHAI, May 6 (Reuters) - China's yuan advanced to a 1-1/2-month high against the dollar on Tuesday, underpinned by an unwinding of carry trades and a broader rush out of U.S. assets into Asia.

The onshore yuan CNY=CFXS rose to a high of 7.2203 per dollar at one point, its strongest level since March 12. It last traded 0.69% higher at 7.2210 as of 0451 GMT.

The surge in the yuan comes alongside broad rallies in currencies of Hong Kong HKD=D4, Taiwan TWD=TP and South Korea as investors rush out of dollars and into home currencies. Hopes of a trade deal between the world's two largest economies have also lent support.

The offshore yuan CNH=D3, which remained open during the Labour Day holiday period, surged past the psychologically important 7.2 per dollar mark a day earlier to a level last seen in November. It last traded at 7.2136.

Analysts said the popular trading strategy of borrowing yuan, Taiwan dollar and other low-yielding currencies to fund higher yielding dollar assets was no longer profitable following recent dollar slides.

"As the strong dollar story reverses, more Chinese exporters may convert their foreign exchange receipts and deposits to the yuan in the coming months," said Gary Ng, senior economist at Natixis.

"The weaker dollar can provide a window of opportunity for the People's Bank of China (PBOC) to act more in monetary policy as the pressure on capital outflows will be less severe."

The yuan surge comes after President Donald Trump on Sunday said the United States was meeting with many countries, including China, on trade deals, and his main priority with Beijing was to secure a fair trade deal.

Beijing had earlier on Friday said it was "evaluating" an offer from Washington to hold talks over Trump's tariffs, although it warned the United States not to engage in "extortion and coercion."

"Hopes of a U.S.-China dialogue and signs of progress on possible trade deals have reinforced the de-escalation thematic," said Christopher Wong, FX strategist at OCBC Bank.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC, around which the yuan is allowed to trade in a 2% band, at 7.2008 per dollar, its strongest since April 7 but only 6 pips firmer than the previous setting.

"Today's fixing showed that the PBOC is reluctant to see strong appreciation of the yuan," said Becky Liu, head of China macro strategy at Standard Chartered.

Liu said the yuan's regional underperformance is expected to continue, noting possible frontloading foreign exchange demand by overseas listed Chinese companies for their dividend payments and uncertainty around Sino-U.S. trade relations.

"We think Chinese authorities will not want to see any sharp gain in the yuan," she said. "As reflected in recent PMI data, the trade war is clearly taking its toll and we still believe that China will want to utilise the yuan as a tool to mitigate against trade pressures, alongside fiscal and monetary stimulus."