China yuan reference rate in sharpest rise in 5 months after euro rally

* Midpoint up 0.14 pct, biggest single-day gain since Jan

* Reflects 0.4 pct fall in dollar index overnight - traders

* Implies PBOC won't let yuan depreciate more if dollar weakens

SHANGHAI, June 6 (Reuters) - China's yuan strengthened against the dollar on Friday after the central bank raised the daily fixing for its currency by the largest percentage in a single day since early January, as the dollar slid against a basket of currencies in global markets. The People's Bank of China (PBOC) usually refers to movements in the dollar index the previous day when setting the official reference rate, or midpoint, which dictates the daily trading range for the yuan. Before trading began on Friday, it set the midpoint up 0.14 percent at 6.1623 per dollar. The dollar plunged by 0.4 percent in overnight trade after the euro staged a dramatic rebound after the European Central Bank eased policy. The higher fixing begs the question of whether China is preparing to put the yuan back on an appreciation course after guiding it downward by more 3 percent since the beginning of this year, but Chinese forex traders were cautious. "While today's midpoint reflects the dollar's global weakness overnight, it also indicates that China may not let the yuan depreciate further if the dollar's weakness lingers due to the euro zone easing," said a senior dealer at a European bank in Shanghai. He and several other dealers, however, were quick to add that one day's midpoint would not be enough to decode the intention of the Chinese monetary authorities. The spot market's reaction to the fixing was conservative, with the yuan trading at 6.2486 per dollar in late morning trade, up 0.1 percent from Thursday's close but remaining in a relatively narrow range. In addition, traders said that there were no signs that the PBOC was intervening in trading to push the spot rate up.

DOLLAR SUPPLY AND DEMAND BALANCED June is the peak month for Chinese companies listed in offshore markets to buy dollars in order to make interim cash dividend payments to investors, traders said. Typically such purchases are a feature of the currency market through until mid-July. But traders also said that major banks appeared to be unloading the proceeds from recent initial public offerings by Chinese companies on U.S. markets, increasing dollar supply and leading to a rough balance of supply and demand. "The second quarter of a year is also the quarter when China's foreign trade typically picks up compared with the first quarter," said a dealer at a Chinese commercial bank in Shanghai. "If China records a decent trade surplus in May and June, the PBOC will have enough reasons to let the yuan bounce back to some extent." For now, traders forecast that the yuan will mostly move in a narrow range of 6.23 to 6.27 per dollar in June. The International Monetary Fund said on Thursday that the yuan was moderately undervalued. "China's external position is moderately stronger than the level consistent with medium-term fundamentals and desirable policies. On that basis, the real exchange rate is moderately undervalued," the IMF said in a statement. The PBOC has guided the yuan to depreciate by 3.1 percent against the dollar so far this year to deter speculators from betting on a non-stop yuan rise. While pessimism on the yuan persists, short positions fell to their smallest level since late February in the last two weeks on hopes the currency was stabilising, a Reuters poll showed on Thursday. Before this year's unexpected depreciation, the yuan had steadily appreciated by more than 30 percent since its landmark revaluation in 2005.

The onshore spot yuan market at a glance:

Item Current Previous Change (pct) PBOC midpoint 6.1623 6.1708 0.14 Spot yuan 6.2486 6.2548 +0.10

Divergence from midpoint* 1.40 (pct)

Spot change ytd -3.12 Spot change since 2005 32.45


*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.

The offshore yuan market at a glance:

Instrument Current Difference

from onshore (pct)

Offshore spot yuan 6.2498 -0.02 Offshore non-deliverable 6.2509 -1.42


*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 spot performance versus midpoint after trading band widened http://link.reuters.com/jyz38v - China's yuan, other emerging mkt currencies vs dollar http://link.reuters.com/xyd46v - Global currency performance INTERAI've CTIVE GRAPHIC: http://link.reuters.com/cyx46v - China's trade surpluses mainly driven by weak imports rather than strong exports. GRAPHIC: http://link.reuters.com/qav68s - 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)