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Yuan hits 2014 low as holiday mood lingers, set to recover on fund inflows

* Yuan touches 6.0645/dollar in morning, lowest this year

* Many market players still on leave on holiday-traders

* Yuan set to return to 6.04/05 range later this month

* FX regulator reports heavy inflows into China in 2013

SHANGHAI, Feb 7 (Reuters) - China's yuan touched its lowest level of the year on Friday in anaemic trade after a week-long holiday break, but traders expect it will soon start to appreciate again as fund inflows pick up. "The exchange rate was distorted by thin volume as many market players remain on leave," said a trader at a Chinese commercial bank in Shanghai. "But the yuan is likely to rebound late next week when holiday takers return to work." The spot yuan hit an intraday low of 6.0645 per dollar, its weakest rate versus the dollar so far in 2014, but trimmed some losses to stand at 6.0632 at midday, still down 0.05 percent from the close of Jan. 30, the last trading day ahead of the Lunar New Year holiday. The moderate fall came after the central bank set its daily yuan midpoint mildly lower at 6.1089, or 0.06 percent weaker than the fix on Jan. 30. But traders said China's robust exports and economic growth in comparison with other major economies would continue to ensure capital inflows, even though recent financial crises in including Turkey and Argentina, and the U.S. Federal Reserve's tapering of quantitative easing (QE) are expected to cause capital outflows from many emerging markets. In a sign of such inflows, China posted a $188.6 billion current account surplus in 2013 and a $242.7 billion surplus in its capital and financial account, preliminary data from the country's foreign exchange regulator showed on Friday. China's current account surplus last year was equivalent to 2 percent of its gross domestic product, Reuters calculations based on the data showed. Buoyed by continued capital inflows into China, traders said the yuan was set to return to the 6.04/05 range that it had mainly moved in January later this month. In the longer term, many market watchers expect the yuan to gain around 3 percent over the course of 2014, similar to its 2.9-percent rise last year. The yuan has gained 2.8 percent over the last 12 months as of Feb. 5, one of the few emerging market currencies to have gained as capital has fled other markets. For example, the Indian rupee is down 15 percent, the ruble has lost nearly 14 percent, and Brazil's real is down nearly 18 percent over the same period. GRAPHIC: http://link.reuters.com/cyx46v Despite concerns about China's cooling economic growth, the yuan also is seen gaining strength this the year on expectations the central bank will gradually widen the currency's trading band. Currency strategists polled by Reuters expect it to trade at 6.04 by April, 6.00 by July and 5.96 by January 2015.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1089 6.1050 -0.06 Spot yuan 6.0632 6.0600 -0.05

Divergence from midpoint* -0.75 (pct)

Spot change ytd -0.15 Spot change since 2005 revaluation +36.50

*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

(pct)

Offshore spot yuan 6.0322 +0.51* Offshore non-deliverable 6.1120 -0.05**

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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KEY DATA POINTS - Yuan is positive outlier compared with plunging emerging market currencies GRAPHIC: http://link.reuters.com/cyx46v - Hot money tracker: Hot money inflows slowed to a trickle in December 2013 GRAPHIC: http://link.reuters.com/saz74t - 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 - 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 Kim Coghill)