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China's yuan settles during quiet week, onshore-offshore gap melts

midday, the onshore yuan was changing hands at 6.0924
Thursday, 28 Nov 2013 | 11:23 PM ET

* Gap for offshore and onshore yuan now 50 pips, vs 300 pips at peak

* Spot yuan has traded in tiny band this week post-volatility

HONG KONG, Nov 29 (Reuters) - The Chinese currency is set to end one of its quietest trading weeks this year with the onshore yuan stuck in a tight range as investors consolidated positions after a volatile spell. But in the Hong Kong currency market, the yuan has extended its weakening streak this week, due to month-end dollar purchases by importers and moves by banks to cover their long bets on the Chinese currency. Asian currencies were on the defensive against the dollar, with trading in most markets light with U.S. financial markets closed for Thanksgiving on Thursday and only open a half-day on Friday. compared with 6.0925 at the previous close after a slightly stronger fixing. It has wallowed in a 15 pip band all this week, a fraction of the total range of more than 1,200 pips the People's Bank of China allows the currency to roam. "Flows are very light with the offshore yuan seeing some selling by importers with some interbank flows trying to close the gap between the offshore and the onshore yuan," said a trader at a U.S. bank, referring to the difference in the yuan level on the mainland and in Hong Kong. Offshore Chinese assets, largely equities, have received a boost after authorities unveiled an ambitious roadmap to reform the Chinese economy in coming years. While equity markets remain enthusiastic about reform prospects, with the gap between the A-H share markets at its widest in three years, the currency markets have scaled back some of their enthusiasm with the gap between the offshore and the onshore markets closing rapidly this week. The gap between the offshore and the onshore yuan has now dwindled to less than 50 pips, from more than 300 pips on Nov. 19, and traders expect it to disappear in coming days. On Friday, offshore yuan was trading at 6.0876 per dollar, slightly weaker than Thursday's close of 6.0864. It hit a record high of 6.0573 per dollar on Nov. 19. One-year offshore yuan forwards traded near the day's lows at a 680 pips premium to the spot rate and back to Thursday's closing levels signaling ample liquidity in the foreign exchange markets.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1325 6.1343 0.03% Spot yuan 6.0926 6.0925 0.00%

Divergence from midpoint* -0.65%

Spot change ytd 2.26% Spot change since 2005 revaluation 35.85% *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 Offshore spot yuan 6.0880 0.08% Offshore non-deliverable 6.1487 -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. .

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 May show reduction in yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money inflows turn to outflows in May 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

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(Editing by Richard Borsuk)