Yuan closes up on central bank guidance, dollar weakness

(Updates to close) SHANGHAI, March 5 (Reuters) - The yuan closed up against the dollar on Tuesday on a stronger fixing by the central bank after the greenback fell against a basket of major currencies. While trading volumes were much stronger than they were in Monday's morning session, clocking over $12 billion, it remained tightly range-bound between 6.2237 and 6.2221 yuan per dollar. Adding to the currency's strength, China's central bank and commercial banks bought 683.7 billion yuan ($109.83 billion) worth of foreign exchange on a net basis in January, implying a rise in money inflows, data released on Tuesday showed.

China's forex regulatory agency said it expects more speculative inflows this year. "The impact of the international financial crisis persists, the low interest rate policy in major economies continues to push up global liquidity and support risk appetite, which will stimulate international arbitrage capital inflows," the State Administration of Foreign Exchange said in a statement on its website. Corporates are also bullish, with Chinese banks buying more forex off domestic companies than they sold, indicating Chinese executives are stocking up on yuan. However, some traders say that the yuan still could depreciate in the near term if neighboring currencies continue to depreciate and China's economy remains weak. Some cite the weak manufacturing purchasing managers' index reading in February, which was unusual given the seasonal bump the index usually gets from the lunar new year holiday, while others consider the rollout of new tough restrictions on real estate as negative for growth in the near term.

The onshore spot yuan market at a glance:

Item Current Previous Change

(pct)

PBOC midpoint 6.2797 6.2822 +0.04 Spot yuan 6.2209 6.2251 +0.07

Divergence from midpoint* -0.94

Spot change ytd +0.15 Spot change since 2005 revaluation +33.04

*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 official midpoint rate it sets each morning.

OFFSHORE CNH MARKET Offshore spot yuan continue to trade at a slight premium to the onshore version, as it has for the last several months. Analysts say this is due to the fact that the offshore market is not restricted by the central bank's midpoint, and because Hong Kong's markets are generally more influenced by loose monetary policy in the U.S. and Japan. Offshore one-year non-deliverable forwards continue to price at a significant discount to the current midpoint.

The offshore yuan market at a glance:

Instrument Current Difference from

onshore (pct)

Offshore spot yuan 6.2160 +0.08*Offshore non-deliverable 6.3234 -0.70**

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 eyes market forces to drive FX reform

- Bank of China extends yuan deposits to promote redback's rise - Taiwan yuan bonds may be dogged by policy barriers

- China restrains yuan rise in response to Asian currency weakness - High dim sum yields masking solid credit stories

DATA POINTS - 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 in recent months reflect strong yuan appreciation expectations. 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)