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China's yuan rises, upside trend seen intact

Michelle Chen
Monday, 28 Oct 2013 | 12:22 AM ET

* Yuan up slightly vs dollar after near-record high midpoint

* Corporate demand to sell dollars remains strong

* Yuan seen rising to 6.05/dollar by end-2013

HONG KONG, Oct 28 (Reuters) - China's yuan rose against the dollar on Monday, after the central bank set the midpoint near its highest with traders expecting strength in the Chinese currency to sustain for the rest of the year. The People's Bank of China (PBOC) guided its currency to a fresh round of appreciation in the past two weeks by allowing it to hit a record of 6.0802 on Friday. It has gained nearly 2.5 percent so far this year with a substantial chunk of gains coming in the latest round this month. Traders say corporate demand to sell dollars remains strong due to China's trade surplus as well as hot money inflows after the U.S. Federal Reserve delayed its plan to wind back stimulus. "We expect the yuan to rise to 6.05 at the end of the year. The PBOC will keep the yuan's strength in the long term as it's making an effort to make it an international currency," said a trader at a Chinese bank in Shanghai. Spot yuan traded at 6.0833 near midday, 0.01 percent stronger than Friday's close of 6.0840. The PBOC set the yuan's midpoint at 6.1336, three pips weaker than Friday's 6.1333. Sentiment towards the world's second-largest economy and its currency has improved considerably after a series of positive data from China, the most recent of which was stronger than expected manufacturing activity. Long positions in the yuan hit a five-month high in the last two weeks as investors grew more bullish on most emerging Asian currencies, a recent Reuters poll showed. However, the yuan's rapid appreciation has made some traders cautious and left them wondering if the PBOC will take a breather before guiding it to a new high later this year. "We are waiting for further signals from the central bank to see if it will allow the yuan to continue to rise so fast," said the Chinese trader.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1336 6.1333 0.00% Spot yuan 6.0833 6.084 0.01% Divergence from midpoint* -0.81% Spot change ytd 2.41% Spot change since 2005 revaluation 36.04%

*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 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 6.0754 0.13%* Offshore non-deliverable 6.1493 -0.26%**

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 Jacqueline Wong)