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China's yuan edges higher on PBOC guidance, upside seen limited

Lu Jianxin and Gabriel Wildau
Tuesday, 5 Nov 2013 | 12:35 AM ET

* PBOC sets official midpoint slightly stronger

* Breaks string of six straight weaker fixings

* Traders see yuan stabilising below recent record highs

* PBOC expected to keep yuan in narrow range around 6.1/dlr

SHANGHAI, Nov 5 (Reuters) - China's yuan edged up against the dollar on Tuesday after the central bank set a slightly firmer midpoint, signalling a likely end to a week-long weakening trend for the Chinese currency. Before Tuesday, the People's Bank of China had set the official base rate, weaker for the sixth straight session, guiding the Chinese currency away from the slew of all-time highs touched in mid-October. The dollar/yuan exchange rate is permitted to rise or fall as much as 1 percent from the midpoint each day. "The PBOC's midpoint today sent a signal of the end of the consolidation period," said a trader at a Chinese state-owned bank in Shanghai. "But the slightly stronger midpoint does not indicate another upward trend for the yuan, rather a coming period of stability." Spot yuan traded at 6.0964 per dollar near midday, up 0.05 percent from Monday's close of 6.0992 after the PBOC fixed its midpoint at 6.1447, slightly up from Monday's 6.1482. Traders expect the yuan to trade narrowly -- within about 100 pips around 6.1 per dollar -- in the coming weeks, barring major market-moving news. The yuan stabilised on Monday after dropping 0.26 percent last week, its biggest weekly fall since a 0.4 percent decline for the week ended June 1, 2012. The consolidation came after the central bank guided the yuan to a slew of record highs around mid-October, reflecting a weakening dollar in global markets at the time, as well as heavy dollar supply in the domestic market, traders said.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1447 6.1482 +0.06% Spot yuan 6.0964 6.0992 +0.05% Divergence from midpoint* -0.79% Spot change ytd 2.20% Spot change since 2005 revaluation 35.76%

*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 Offshore spot yuan 6.0857 0.18%* Offshore non-deliverable 6.1551 -0.17%**

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 - CHINA MONEY - PBOC hopes to drain sloppy money without raising primary rates as growth revives - 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)