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China's yuan edges up after better-than-expected exports, trade surplus data

Friday, 8 Nov 2013 | 12:31 AM ET

* Strong data explains abundance of dollar supply in mkt

* But traders expect PBOC to keep yuan stable for now

* State banks absorb surplus dollar supply in market

* Yuan seen moving around 6.1/dollar in coming weeks

SHANGHAI, Nov 8 (Reuters) - China's yuan edged higher against the dollar on Friday after the government posted better-than-expected exports and trade surplus data, giving an explanation for what traders have repeatedly said was a recent abundance of dollars in the domestic market. China's export growth rebounded by 5.6 percent in October from a year earlier, beating market expectations for a 3.2 percent rise and adding to a run of indicators suggesting that the economy has found its footing as Beijing prepares to lay out its reform agenda for the next decade. Imports rose 7.6 percent against forecasts of an 8.5 percent rise, leaving the trade surplus at $31.1 billion compared with forecasts of $23.9 billion. "The data confirms why the market has recently seen an abundance of dollar supply, that keeps the yuan under pressure to appreciate," said a dealer at a European bank in Shanghai. "But the market is always dominated by state-owned banks, who are typically dollar buyers in the market to absorb extra dollar supply, believed on behalf of the monetary authorities. That has capped the yuan's gains." Spot yuan traded at 6.0903 per dollar at midday, up 0.01 percent from Thursday's close of 6.0908. The People's Bank of China (PBOC) fixed its midpoint at 6.1355 on Friday, or 0.15 percent stronger than Thursday's midpoint of 6.1450. However, the PBOC has generally set a slew of weaker midpoints recently, guiding the Chinese currency away from the string of all-time highs touched in mid-October. As the yuan's movements are mainly guided by the central bank and influenced by dollar purchases of state-owned banks, traders expect the yuan to trade narrowly around 6.1 per dollar in the coming weeks, unless the PBOC changes its recent stance. A Reuters poll on Thursday showed analysts expect the yuan will continue to hit record highs, rising slowly to 6.08 in six months and 6.03 by October next year. Those predictions are slightly better than last month and signal expectations that the People's Bank of China will gradually widen its trading band as the economy improves.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1355 6.1450 +0.15% Spot yuan 6.0903 6.0908 +0.01% Divergence from midpoint* -0.74% Spot change ytd 2.30% Spot change since 2005 revaluation 35.90%

*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 6.0786 0.19%* Offshore non-deliverable 6.1551 -0.32%**

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

(Reporting by Lu Jianxin and Pete Sweeney; Editing by Kim Coghill)