HONG KONG, Sept 16 (Reuters) - The yuan held a firm tone on Monday after a holiday weekend, with markets cheered by signs of progress in U.S.-China trade negotiations though weak economic data at home and turmoil in oil markets curbed gains.
Ahead of high level trade talks next month, Beijing exempted duties on U.S. goods and Washington delayed a tariff increase in a rapid exchange of goodwill gestures last week, encouraging investors.
But that optimism was somewhat dented after data on Monday showed China's August industrial production grew at its slowest in 17 years, flagging concerns over cooling economic growth.
Earlier, Chinese Premier Li Keqiang acknowledged it would be "very difficult" to maintain growth at 6% or more amid the global economic slowdown and rise of protectionism.
The onshore yuan initially climbed on trade headlines to 7.0650 per dollar, its strongest since Aug. 22. It later trimmed gains to 7.0718 by midday, still up 0.1% on the day. Markets were closed on Friday for the Mid-Autumn Festival.
The offshore yuan, which traded on Friday and had already digested the U.S.-China goodwill gestures, slipped 0.23% from the previous close to 7.0638 per dollar.
"Positive expectations on trade war alone cannot push USDCNY to 7," said a trader with a Chinese bank in Shanghai who expects the yuan to trade between 7 and 7.1 per dollar in the short run.
He added that there were more clients taking advantage of yuan strength to buy foreign currencies, countering the Chinese currency's rally.
A surprise attack on Saudi Arabia's oil facilities over the weekend hurt emerging market currencies such as the yuan. Investors took flight to safety and steered clear of risk assets as oil prices spiked and Asian stocks sunk across the board.
"CNY/CNH may also see bearish positions return. Higher oil price may have larger impact on renminbi's expectations now that current account expectations have dwindled and is flirting with deficit," Citi's analysts said in a note on Monday.
China is now looking at possible deficits in both its capital and current accounts, as the country reduces economic reliance on exports and consumes more.
It will take time to gauge the oil rally's impact on the Chinese economy and the yuan, said a second trader in Shanghai, who works for a foreign bank.
"Risk-off and weaker data have brought pressure today. But the longer-term impact will not be reflected immediately. It will depend on the pace of recovery (in oil supply)," he said.
The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 91.67, weaker than the previous day's 92.1.
The global dollar index fell to 98.16 from the previous close of 98.257.
The yuan market at 0402 GMT:
ONSHORE SPOT: Item Current Previous Change
PBOC midpoint 7.0657 7.0846 0.27% Spot yuan 7.0718 7.0788 0.10%
Divergence from 0.09% midpoint*
Spot change YTD -2.81% Spot change since 2005 17.04% revaluation
Key indexes:
Item Current Previous Change Thomson 91.67 92.1 -0.5 Reuters/HKEX
Dollar index 98.16 98.257 -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 percent from official midpoint rate it sets each morning.
OFFSHORE CNH MARKET
Instrument Current Difference
from onshore
Offshore spot yuan 7.0638 0.11%
*
Offshore 7.1275 -0.87%
non-deliverable