China's yuan ticks up as US-China trade truce lifts sentiment

SHANGHAI, June 12 (Reuters) - China's yuan strengthened against the dollar on Thursday, as the latest trade truce between Washington and Beijing raised hopes that the world's two largest economies could avoid any further escalation in their tariff row.

However, the gains were capped by a weaker-than-expected midpoint guidance fix, which markets interpreted as an official attempt to keep the yuan stable in the face of broad dollar weakness. Deepening deflationary pressure and slowing exports also dragged on the Chinese currency.

U.S. President Donald Trump on Wednesday said he was very happy with a trade deal that restored a fragile truce in the U.S.-China trade war, a day after negotiators from Washington and Beijing agreed on a framework covering tariff rates.

"This was a conversation that enabled more conversations and prolong the trade truce," Maybank analysts said in a note.

"However, there was little seen in terms of resolving core differences and issues such as national security, tariffs and technology race. There was little to suggest what can turn this trade truce a tad more permanent."

As of 0342 GMT, the onshore yuan CNY=CFXS was 0.13% higher at 7.1800 per dollar, while its offshore counterpart CNH=D3 was up 0.24% in Asian trade to 7.1818.

Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate CNY=PBOC at 7.1803 per dollar, its strongest since April 2. The spot yuan is allowed to trade 2% either side of the fixed midpoint each day.

The central bank had set firmer-than-expected midpoint guidance rates on most of the days since November to prevent excess yuan weakness.

However, Thursday's official guidance was 100 pips weaker than a Reuters' estimate CNY=RTRS of 7.1703, with some traders interpreting it as an attempt to prevent any large upswing in the yuan at a time of broader dollar weakness.

Overnight, a milder U.S. inflation report for May led traders to ramp up bets of a Federal Reserve rate cut as early as September, keeping pressure on the dollar. 0#USDIRPR

Also, a slew of recent Chinese economic data, including inflation and trade, pointed to a slowing economy and may not support a strong yuan in the near term, traders and analysts said.

"Economic momentum remains weak, amid persistent deflation, while exports remain the main engine of growth," FX analysts at Barclays said in a note.

"We continue to see yuan depreciation as a necessary release valve alongside incremental fiscal and monetary policy easing."

Hu Yifan, regional chief investment officer and chief China economist at UBS Global Wealth Management, expects a loose monetary policy stance to be maintained for the remainder of this year.

"We think there will be another 50 to 100 basis points of reserve requirement ratio (RRR) cuts in the second half of this year, and interest rates to be reduced by 20 to 30 basis points, due to low inflation," Hu said.

"If tariffs are lowered, fiscal policy may not be needed, and China may not want to use up all its firepower."

LEVELS AT 0342 GMT: