China's yuan eases from 32-month peak, firmer-than-expected fix caps losses

SHANGHAI, Feb 2 (Reuters) - China's yuan slipped from a 32-month peak against the dollar on Monday, tracking broad weakness across Asian currencies, as investors continued to digest the potential implications of Kevin Warsh's nomination to lead the Federal Reserve.

But losses were capped as the central bank set the first firmer-than-expected guidance fix in two months, a move that was interpreted by investors as an attempt to keep the market stable.

Before the market opened, the People's Bank of China (PBOC) set the midpoint CNY=PBOC at 6.9695 per U.S. dollar, 17 pips weaker than the previous setting on Friday but 15 pips firmer than a Reuters estimate CNY=RTRS of 6.9710.

The central bank has been consistently setting the midpoint weaker than what the market projected since November.

Monday's midpoint fixing showed that "the PBOC prefers a gradual and steady appreciation of the yuan, instead of the previous market narrative for PBOC to keep the yuan 'weak,'" said Wee Khoon Chong, APAC macro strategist at BNY.

"However, it would be unwise to assume USD/CNY will move in only one direction. Continued strength in DXY and risk-off sentiment could lead to equity outflows and push both USD/CNY and USD/Asia higher."

In the spot market, the onshore yuan CNY=CFXS traded at 6.9526 per dollar at 0403 GMT, compared with a 32-month high of 6.9444 reached last Thursday.

Its offshore counterpart CNH=D3 last fetched 6.9522 at 0403 GMT.

A bout of broad Asian currency weakness came as investors expect Warsh to rein in the Fed's balance sheet, which is typically supportive of the dollar as it reduces the money supply in the market.

Meanwhile, his nomination also prompted sharp losses in precious metals, which were all down more than 3% on Monday, dragging A shares lower.

Separately, the market's reaction to China's January manufacturing data was muted. The data showed that factory activity faltered as weak domestic demand dragged down production at the start of the new year, an official survey showed on Saturday.

Key onshore vs offshore levels:

• Overnight dollar/yuan swap onshore -4.75 pips vs. offshore -4.75

• Three-month SHIBOR SHIBOR= 1.6 % vs. 3-month CNH HIBOR 1.8 %

LEVELS AT 0403 GMT: