Yuan touches two-month high but headed for flat week; caution guides trading

* Yuan 0.03 pct firmer at 6.2139/dlr near midday

* Market players cautious about betting on market moves

* Spot rate closely tracking changes in c.bank midpoint

* C.bank favors stability amid currency war fears

SHANGHAI, March 15 (Reuters) - China's yuan briefly touched a two-month high on Friday but was set to end the week unchanged as uncertainty over how the central bank will respond to the weakening of other Asian currencies weighed on the market. Spot yuan changed hands at 6.2139 per dollar near midday, up 0.03 percent from Thursday's close, after touching a two-month high of 6.2133 in early trade. The yuan has mainly moved sideways this week after closing last week at 6.2147. Despite market fundamentals supporting yuan appreciation, including robust trade surpluses in recent months and a return of apparent hot money inflows in January, traders and corporates have been cautious about taking aggressive long positions. As a result, the spot rate has moved closely in line with the People's Bank of China's (PBOC) daily midpoint. The PBOC's fixing on Friday was 6.2723, 0.05 percent firmer than Thursday. The PBOC appears to be taking a wait-and-see approach in terms of a response to the weakening of Asian currencies, notably the Japanese yen. The central bank has so far not pulled the yuan weaker to offset the impact of the weaker Japanese currency, but it has also kept a lid on market forces that might otherwise push the yuan higher. Traders expect the yuan to hold steady in the weeks ahead, fluctuating between 6.21 and 6.24. But if the yen and other Asian currencies fall much further, some traders predict the PBOC could force the yuan weaker by as much as two percent. On the other hand, if the midpoint strengthens to below 6.27, traders say the market will take it as a sign that PBOC is prepared to accept further appreciation in the spot rate.

The onshore spot yuan market at a glance:

Item Current Previous Change

(pct)

PBOC midpoint 6.2723 6.2752 +0.05% Spot yuan 6.2139 6.2155 +0.03% Divergence from -0.93%

midpoint*

Spot change ytd +0.26% Spot change since 2005 revaluation +33.19%

*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

The offshore yuan market at a glance

Instrument Current Difference from

onshore (pct)

Offshore spot yuan 6.2105 *0.06%

(pct)

Offshore non-deliverable 6.3049 **-0.52%

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's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate yuan purchases in recent months reflect heightened yuan appreciation expectations or at least a reduction in long dollar positions. GRAPHIC: http://link.reuters.com/syx74t

- Hot money inflows, which should support yuan appreciation, returned in Jan following nine straight months of outflows. 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

RECENT DEVELOPMENTS - China restrains yuan rise in response to Asian currency weakness - 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

- 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

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(Editing by Sanjeev Miglani)