Yuan closes up 5 pips on last-minute recovery

(Updates to close) SHANGHAI, Jan 17 (Reuters) - The Chinese yuan closed up slightly on Thursday in a day marked by narrow trade but strong volume, tracking fluctuations in the dollar index. The central bank set the official midpoint weaker for the second consecutive day on Thursday after the dollar index gained in overnight trade, but the spot yuan strengthened abruptly in the last few minutes prior to market close to finish at 6.2160 per dollar, 5 pips firmer than Wednesday's close. Transaction volumes closed at $21.2 billion, down slightly from Wednesday but still above average. The currency traded within a narrow range between 6.2193 and 6.2143. Traders expect the yuan to move in a relatively narrow range of 6.20 to 6.25 per dollar in coming weeks, barring significant new developments.

The onshore spot market at a glance:

Item Current Previous Pct change

close

PBOC midpoint 6.2767 6.2745 +0.04 Spot yuan 6.2160 6.2165 +0.01 Divergence from midpoint 0.97

(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 6.1875 +0.43*

(pct)

Offshore 6.2775 -0.01**

non-deliverable forwards (pct)

* The difference between offshore 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 Simon Cameron-Moore)