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Yuan rallies on signs c.bank will tolerate record year-end

Lu Jianxin and Pete Sweeney
Friday, 6 Dec 2013 | 12:54 AM ET

* Yuan market shows signs of activity for first time since late Oct

* Major banks stop intervening on behest of c.bank - traders

* Yuan typically stages final round of rises at end of year

* Yuan may hit record highs, but seen capped around 6.05/dollar - traders

SHANGHAI, Dec 6 (Reuters) - China's yuan strengthened against the dollar on Friday after the central bank set a record high official midpoint, a move traders said signalled that the bank is ready to allow the currency to end the year with another rally. The Chinese currency market's signs of rejuvenation followed weeks on end in range-bound torpor, which traders said was due to central bank meddling to hold back the exchange rate. Spot yuan traded at 6.0855 per dollar near midday, up 0.1 percent from Thursday's close of 6.0913 and within close reach of its record high of 6.0802 set on Oct. 25. The People's Bank of China (PBOC) fixed Friday's midpoint at 6.1232, up 0.13 percent than Thursday's 6.1310. "With the PBOC appearing to have launched a new round of yuan appreciation, we expect the currency to hit quite a few record highs in coming weeks," said a dealer at a Chinese commercial bank in Shanghai. "But the overall rise for the rest of this year is likely to be limited, with the yuan likely to be capped at around 6.05 by the end of 2013." State-owned banks, believed by traders to regularly buy up dollars in the domestic market to curb the yuan, sat on the sidelines on Friday, suggesting the central bank has taken its foot off the brake. The PBOC typically allows the yuan to appreciate slightly in the final one or two weeks of the year to make the currency's annual appreciation look better, but traders said this time the bank appears to be starting earlier. From early November until earlier this week the central bank had set the official base rate, from which the yuan is allowed to rise or fall 1 percent in a day, in a tight range just above 6.14, driving the yuan's volatility to its lowest since 2010.

The central bank has controlled the pace of yuan rises since the currency's landmark revaluation in July 2005. It has let the currency appreciate mainly for major political events, such as Chinese leaders' visits to the United States or participation in global forums, while maintaining stability at other times. Despite this gradualism, the yuan has strengthened 36 percent since the revaluation, signalling that the government is determined to move towards a fully convertible currency over time, starting with pilot zones around the country.

The currency has risen 2.4 percent so far this year and is heading for a 3 percent appreciation for 2013 assuming it lands somewhere around 6.05 per dollar by year-end, tripling a 1-percent rise in 2012 and exceeding traders' expectations for a 2-percent gain.

The onshore spot yuan market at a glance:

Item Current Previous Change PBOC midpoint 6.1232 6.1310 +0.13% Spot yuan 6.0855 6.0913 +0.10% Divergence from midpoint* -0.62% Spot change ytd +2.38% Spot change since 2005 revaluation +36.00%

*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 * 6.0750 +0.17% Offshore non-deliverable 6.1330 -0.18% forwards **

*Premium for offshore spot over onshore

**Figure reflects difference from PBOC's official midpoint, since non-deliverable forwards are settled against the midpoint. .

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> RECENT DEVELOPMENTS - China central bank suggests faster tempo for freeing yuan

- China investors face bumpy ride as reform speculation intensifies - Unprecedented securitisation plan aims to slow rapid money growth - CHINA MONEY - PBOC preparing market for more yuan volatility

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 behavior reflects yuan appreciation expectations. GRAPHIC: http://link.reuters.com/tyx74t - Hot money returned to China in Sept after two months of outflows 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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(Additional reporting by Coco Li; Editing by Jacqueline Wong and Eric Meijer)