Yuan stays flat, recovery in trading volume sustained

* C.banks sets weaker fix as euro flattens out

* Supply and demand balanced, volumes vigourous - traders

* Offshore yuan maintains premium on foreign optimism

SHANGHAI, Dec 20 (Reuters) - The yuan traded virtually flat in noon trade on Thursday despite the central bank setting a marginally weaker trading range for the day, as traders tracked global currency markets that await more progress in U.S. budget talks to avoid a "fiscal cliff".

The yuan changed hands at 6.2294 per dollar at midday, after closing at 6.2303 on Wednesday.

The central bank set its midpoint at 6.2877 per dollar compared to 6.2865 on Wednesday. The exchange rate is only allowed to diverge by 1 percent in either direction from the central bank's daily midpoint.

Market volumes remained healthy with $5 billion transacted by 11:45 a.m. (0345 GMT), with traders saying supply and demand from corporates remained relatively balanced in the absence of developments at home or abroad to give fresh direction.

The dollar index fell slightly overnight and remained on a general downward trend as global forex investors seek to move assets into higher-yielding currencies like euros or renminbi.

The euro - which the yuan often tracks - trimmed gains after solid German economic data.

OFFSHORE OPTIMISM

The onshore yuan hit an all-time record against the dollar in late November, after which point the Chinese central bank moved to restrain further appreciation, but the offshore market remains bullish.

Offshore yuan (CNH), which is not subject to the central bank's daily trading range, began trading at a premium to the onshore market in late November and went on to set its own record against the dollar on Dec. 11 when it changed hands at 6.2030.

It has remained in that neighborhood since, offering an opportunity for cross-border arbitrage.

In ordinary circumstances, analysts say corporates quickly move to exploit gaps between the CNH and the CNY, and gaps are usually closed quicky, but in this case optimism about the yuan's future value is keeping the CNH strong.

"The spread between CNH and CNY spot could be sustained going into the first quarter of next year due to strong bullish sentiment toward the renminbi, which has less price constraints offshore," said Wang Ju, senior Asian FX strategist at HSBC.

Offshore forwards contracts continue to be more bearish toward the yuan. One-year non-deliverable forwards imply depreciation in the next twelve months, quoting around 6.31 per dollar, a depreciation of over 1 percent.

(Additional reporting by Michelle Chen; Editing by Simon Cameron-Moore)