Yuan firms, offshore premium attracts arbitrage
* Yuan not expected to make radical moves by year-end - traders
* Markets watching debate over U.S. fiscal cliff
* Risk appetite driving funds into offshore yuan
* Sustained CNH-CNY premium creates arbitrage opportunity
SHANGHAI, Dec 19 (Reuters) - China's yuan firmed slightly on Wednesday, but lacked direction in the absence of either central bank intervention or a fresh steer from global currency markets, while offshore spot yuan continued to trade at an unusual premium.
Onshore, the yuan changed hands at 6.2250 per dollar at midday, 0.12 percent stronger than Tuesday's close.
The central bank set its midpoint at 6.2865 per dollar, minutely firmer than Tuesday's fix.
"We are watching both domestic and overseas developments for signs of new direction," a trader at a joint-stock bank in Shanghai said.
"In the absence of further intervention by the central bank, I think we're going to stay in this territory for the rest of the year," she added.
Trading volumes were relatively strong in the morning session, exceeding $5 billion worth of transactions by noon, the most vigorous morning the market has seen this week.
Signs that U.S. politicians might successfully resolve the debate over the pending "fiscal cliff" have encouraged investors to move out of safe-haven dollars in search of currencies with higher yields, including the euro and the renminbi.
The onshore yuan remains in the neighborhood of a record high of 6.2223 against the dollar struck in late November, but the People's Bank of China (PBOC) has since used the midpoint to prevent the yuan from gaining further.
The PBOC allows the exchange rate to rise or fall 1 percent from the midpoint it sets each morning.
But in the offshore market in Hong Kong, where foreign money can flow freely, market-driven appetite for yuan has pushed the offshore spot yuan (CNH) away from the onshore rate, which analysts say has created opportunities for arbitrage.
The CNH dealt rate stood at 6.2060 at midday on Wednesday, 0.31 percent stronger than the onshore rate. The CNH hit a record high against the dollar in intra-day trade on Dec. 11 when it changed hands at 6.2030 per dollar.
Offshore non-deliverable forwards continue to forecast depreciation in twelve months time. One-year non-deliverable forwards changed hands at 6.3080 per dollar.
(Editing by Jacqueline Wong)