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SHANGHAI: China’s yuan strengthened against the dollar on Friday, reversing two days of losses, recovering after bond market woes ebbed and higher seasonal corporate demand for the local currency lent support.

The government bond market stabilised on Friday after posting its worst single-day selloffs in two years earlier this week, with risk appetite boosted amid rising expectations that China will gradually ease its strict COVID-19 restrictions and official moves to support the troubled property sector.

Prior to the market’s opening, the People’s Bank of China (PBOC) set the midpoint rate at a week-low of 7.1091 per dollar, 436 pips or 0.6% weaker than the previous fix of 7.0655.

In the spot market, the onshore yuan opened at 7.1318 per dollar and was changing hands at 7.1255 at midday, 296 pips firmer than the previous late session close.

Despite the gains on Friday, the local currency is on course for its first weekly loss in three, falling about 0.4% versus the dollar.

Stephen Innes, managing partner at SPI Asset Management, said markets were super-sensitive around liquidity in government bond markets following Britain’s experience in September-October.

“Any liquidity deterioration in CGBs (Chinese government bonds) should manifest in CNH (offshore yuan) weakness and a negative impact on A-shares,” Innes said.

Some currency traders said the yuan strength on Friday also came as companies have started to convert foreign exchange receipts into the local currency for various needs and administrative requirements towards the year-end.

However, gains in the yuan were limited by worries over recent rises in domestic COVID outbreaks across the country.

The southern Chinese city of Guangzhou is setting up makeshift hospitals and quarantine sites with capacity for nearly 250,000 beds for COVID infections, officials said on Thursday, as cases across the country hit their highest level since April.

“The risk of further COVID restrictions and associated disruptions are growing as we approach winter,” said Alvin Tan, head of Asia FX at RBC Capital Markets.

“Hence, the near-term risk is actually of more social restrictions, with associated negative effects on economic activity.”

By midday, the global dollar index fell to 106.374 from the previous close of 106.694, while the offshore yuan was trading at 7.131 per dollar.

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