Yuan falls for second day, midpoint set lower as dollar recovers

SHANGHAI, Jan 17 (Reuters) - The Chinese yuan slid for a second day on Thursday as dollar demand recovered in international markets. The central bank set the official midpoint weaker for the second consecutive day after the dollar index gained in overnight trade. Transaction volumes were average, logging more than $7 billion by midday, similar to Wednesday's morning session. The currency traded within a narrow range between 6.2193 and 6.2168 by midday. Traders said that forex buying patterns by the central bank in November and December suggested that regulators and commercial bankers were paying increased attention to movements in the dollar index, as opposed to domestic factors. They now expected the yuan to move in a relatively narrow range of 6.20 to 6.25 per dollar in coming weeks.

The onshore spot market at a glance:

Item Current Previous Pct change

close

PBOC midpoint 6.2767 6.2745 +0.04 Spot yuan 6.2174 6.2165 -0.01 Divergence from midpoint 0.94

(pct)*

Spot change ytd (pct) 0.21 Spot change since 2005 24.88

revaluation (pct)

*The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET The offshore spot yuan (CNH) continued to trade at a premium to the onshore spot, as it has since late November, reflecting foreign expectations of further appreciation.

One-year non-deliverable forwards , which

traders consider an imperfect proxy of expectations for appreciation or depreciation in the PBOC's midpoint, were quoted slightly weaker at midday, implying depreciation. However, spreads have narrowed dramatically in recent weeks as the onshore yuan tests new highs against the dollar.

The offshore yuan market at a glance:

Instrument Current Difference from onshore Offshore spot yuan 6.1890 +0.46*

(pct)

Offshore 6.2825 -0.09**

non-deliverable forwards (pct)

* The difference between onshore spot and the onshore spot

** Offshore one-year non-deliverable forwards (NDFs) reflect market expectations for appreciation or depreciation of PBOC's official midpoint.

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MARKET DRIVERS -- Forces underpinning yuan rally to lose steam in 2013

-- Offshore yuan premium returns as market bets on appreciation -- Spot yuan has rallied strongly since late July 2012, and the PBOC is using its daily midpoint to restrain further appreciation. 1/8Graphic: http://link.reuters.com/pyx74t 3/8 -- China's trade surplus surged in late 2012, but the surge was mainly due to weak imports rather than strong exports. 1/8Graphic: http://link.reuters.com/qav68s 3/8 -- Corporate yuan purchases still exceed dollar purchases, but the gap is narrowing. Exporters are converting progressively smaller portions of their foreign exchange receipts into yuan. 1/8http://link.reuters.com/syx74t 3/8 -- Hot money outflows may be putting downward pressure on the yuan. 1/8Graphic: http://link.reuters.com/saz74t 3/8 -- Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. 1/8Graphic: http://link.reuters.com/sed74t 3/8

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(Reporting by Pete Sweeney; Editing by Jacqueline Wong)