UPDATE 1-China's yuan forwards hit highest since late 2017

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SHANGHAI, Aug 3 (Reuters) – China’s yuan forwards hit a more than 2-1/2 year high on Monday, driven by expectations of a widening yield gap between the world’s two largest economies.

One-year onshore dollar/yuan swap points rose to 1,448 points in afternoon trade, the highest since November 2017, while the offshore swap point for the same tenor hit 1,493 points, the loftiest since December 2017.

Traders and analysts said higher swap points in both onshore and offshore were due to expectations of a widening yield gap between China and the United States, a result of the divergence in the monetary policy stances of the two countries.

“With the Chinese economy recovering, officials have signalled that monetary policy may not be as accommodative as in Q1,” economists at ANZ said in a note.

“Instead of broad-based easing, we expect further easing to be targeted and modest, hinging on the pace of economic recovery.”

China was the world’s first major economy to declare a return growth in the second quarter after a deep slump at the start of the year. However, unexpected weakness in domestic consumption underscored the need for policy to bolster the recovery after the shock of the coronavirus crisis.

Gross domestic product (GDP) rose 3.2% in the second-quarter from a year earlier, beating market forecasts.

Yi Gang, Governor of the People’s Bank of China (PBOC), said in a recent meeting that the government would enhance the effectiveness of monetary policy for certain sectors, according to a statement posted on Monday morning.

Market participants also see China’s macroeconomic policy shifting to normal from emergency mode as the economy bottomed out following a meeting by China’s top decision-making body last week.

In the meantime, the U.S. Federal Reserve last week maintained its dovish policy stance and pledged to “do what we can, and for as long as it takes” to limit damage caused by coronavirus shock. (Reporting by Winni Zhou and Andrew Galbraith; Editing by Jacqueline Wong and Sam Holmes)

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