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Yuan takes breather after series of record highs, upward pressure remains

Lu Jianxin and Pete Sweeney
Tuesday, 22 Oct 2013 | 12:28 AM ET

* Yuan off Monday's record high in PBOC's midpoint

* Global dollar rebound permits pause in yuan appreciation

* But dollar supply remains robust in domestic market

* Yuan will trading narrowly for now, but rise again in late 2013 - traders

SHANGHAI, Oct 22 (Reuters) - China's yuan edged down against the dollar on Tuesday after the central bank took advance of a global dollar rebound to pull the currency's official midpoint back from a record high. But robust dollar supply in the domestic market is likely to keep the yuan under pressure to appreciate in the medium-term. Traders expect the yuan to move narrowly for now before resuming its climb later in the year to test the new psychological barrier of 6.0 per dollar. "Corporate dollar sales still dominate," said a trader at a Chinese state-owned bank in Shanghai. "As long as China continues to record big trade surpluses, keeping the market well supplied with dollars, the yuan will remain on its rising track." Near midday, the yuan fell to 6.0941 per dollar, slightly weaker than 6.0925 at the close on Monday. The currency set record intraday highs every day last week. The People's Bank of China (PBOC) fixed its yuan midpoint at 6.1395 on Tuesday, slightly weaker than Monday's record high of 6.1352 as the dollar index rallied slightly after hit an eight-month low last Friday. The PBOC, while recently tolerating a moderate yuan appreciation, has also stepped up intervention to prevent the currency from rising too much, too fast, traders said. In a sign of such intervention, the central bank and Chinese commercial banks purchased 126.4 billion yuan ($20.73 billion) worth of foreign exchange on a net basis in September, increasing sharply from August' s 27.3 billion yuan.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1395 6.1352 -0.07 Spot yuan 6.0941 6.0925 -0.03

Divergence from midpoint* -0.74 (pct)

Spot change ytd +2.23 Spot change since 2005 revaluation +35.81

*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

The offshore yuan market at a glance:

Instrument Current Difference from onshore

(pct)

Offshore spot yuan 6.0893 +0.08* Offshore non-deliverable 6.1539 -0.23**

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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RECENT DEVELOPMENTS - ANALYSIS-Rally in tightly managed yuan shows China leery of FX reform - CHINA MONEY - PBOC preparing market for more yuan volatility - ANALYSIS-Bullish yuan herd leaves China fundamentals in the dust. - CHINA MONEY - Currency war or no, Beijing doesn't want Asia to take stable.

KEY DATA POINTS - Gap between PBOC midpoint and spot rate is narrowing. GRAPHIC: http://link.reuters.com/qyx74t - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - Corporate FX purchases in July show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money outflows reach record high in July GRAPHIC: http://link.reuters.com/saz74t - Despite relatively stable dollar/yuan exchange rate, the yuan is appreciating on a trade-weighted basis. GRAPHIC: http://link.reuters.com/sed74t

(Editing by Kim Coghill)