Yuan closes at near one-month high; PBOC loosens reins with stronger fix

(Updates to close)

* Spot yuan closes at nearly one-month high of 6.2213/dlr

* Strongest c.bank fixing since Jan. 23

* PBOC gives yuan freer rein as JPY stabilizes

* But traders see little room for further yuan gains

SHANGHAI, Feb 28 (Reuters) - The yuan rose to its highest value against the dollar in nearly a month on Thursday after the central bank set a stronger fixing in response to a weaker dollar in global markets and robust corporate demand for the Chinese currency. The People's Bank of China (PBOC) set its strongest daily midpoint since Jan. 23 at 6.2779 versus the dollar on Thursday, 0.1 percent firmer than Wednesday's fix. The stronger fix came after the dollar index fell 0.4 percent between Wednesday and Thursday mornings. The PBOC typically guides the yuan stronger when the dollar falls against other currencies. Spot yuan closed at 6.2213 per dollar, up 0.10 percent from Wednesday's close and near its intraday high of 6.2208. Trading volume totaled $10.8 billion, down from $11.1 billion on Wednesday the full-day average volume of $14.9 billion in February. The apparent stabilization of the Japanese yen may also be playing a role in the stronger yuan. After a dramatic weakening of the yen since November, the yen has recovered slightly in recent days. Previously, the PBOC had shown reluctance to allow the yuan to appreciate while the yen and other Asian currencies were weakening amid talk of a "currency war". Traders say client demand for yuan is stronger than dollar demand at the moment. The mild weakening of the yuan in February, which saw the currency hit a two-month low of 6.2454 on Jan. 19, prompted many corporate dollar purchasers to complete their purchases out of concern that the yuan could weaken further, said a trader at a foreign bank in Shanghai. Still, traders don't expect the yuan to strengthen significantly in the weeks ahead and cite 6.22 as a resistance point. They expect the rate to fluctuate between 6.22 and 6.24 over the next month.

The onshore spot yuan market at a glance:

Item Current Previous Change

(pct)

PBOC midpoint 6.2779 6.2842 +0.10 Spot yuan 6.2213 6.2273 +0.10

Divergence from midpoint*(pct) -0.90

Spot change ytd (pct) 0.14Spot change since 2005 +33.0

revaluation

*Divergence of the dollar/yuan exchange rate. Negative number indicates that spot yuan is trading stronger than the midpoint. The People's Bank of China (PBOC) allows the exchange rate to rise or fall 1 percent from the official midpoint rate it sets each morning.

OFFSHORE CNH MARKET In the Hong Kong market, the premium between the offshore

yuan and the onshore yuan that began widening in

December has largely disappeared.

The one-year non-deliverable forward contract ,

considered an imperfect indicator of expectations, continues to trade at prices implying depreciation over the next twelve months.

The offshore yuan market at a glance:

Instrument Current Difference from

onshore (pct)

Offshore spot yuan 6.2205 +0.01*Offshore non-deliverable 6.3173 -0.62**

forwards

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

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MARKET DRIVERS - China restrains yuan rise in response to Asian currency weakness - Forces underpinning yuan rally to lose steam in 2013

- The yuan non-deliverable forward (NDF) market is rapidly losing market share as more corporate fund flows are switched to the deliverable market - Spot yuan has rallied strongly since late July 2012, and the PBOC is using its daily midpoint to restrain further appreciation. GRAPHIC: http://link.reuters.com/pyx74t - China's trade surplus surged in late 2012, but the surge was mainly due to weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - 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. GRAPHIC: http://link.reuters.com/syx74t - Hot money outflows may be putting downward pressure on the yuan. GRAPHIC: http://link.reuters.com/raz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t

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(Editing by Sanjeev Miglani)