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China's yuan inches up, on track for second weekly gain

SHANGHAI, Dec 22 (Reuters) - The yuan inched up against the U.S. dollar on Friday on corporate sales of the greenback, and the Chinese currency was on track to strengthen for a second straight week. The dollar edged up in overseas markets on Friday morning though it remained on track for weekly losses, as investors shunned big bets and squared their books ahead of the holidays. The Chinese currency, which has gained some momentum this week, has strengthened around 5.6 percent this year against the dollar - recovering from 2016's roughly 6.5 percent loss, its worst annual performance since 1994. Prior to market opening on Friday, the People's Bank of China set the midpoint rate at 6.5821 per dollar, 26 pips or 0.04 percent weaker than the previous fix of 6.5795. In the spot market, the onshore yuan opened at 6.5835 per dollar and was changing hands at 6.5723 at midday, 132 pips firmer than the previous late session close and 0.15 percent stronger than the midpoint. If the yuan ends the late night session at the midday level, it would have strengthened 0.54 percent this week. It gained around 0.24 percent last week. Traders said they expect the Chinese currency to move only a little the remainder of the year, as some year-end dollar buying likely would keep it from testing highs. A Shanghai-based trader at a foreign bank said low trading volume this week created a situation where some trades could move the yuan significantly. Over the past few months, the yuan has traded in a narrow range. Market watchers said they believed Chinese authorities were comfortable with this and the exchange rate level. Some signs of liquidity stress in the offshore yuan market has also supported the Chinese currency, according to traders. Hong Kong's offshore yuan overnight borrowing rate, or HIBOR, was fixed on Friday at 2.30583 percent, its highest since Nov. 28. The offshore yuan firmed a touch, and was trading 0.07 percent stronger than the onshore spot at 6.5678 per dollar at midday. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 95.69, weaker than the previous day's 95.74. The global dollar index rose to 93.394 from the previous close of 93.278. Offshore one-year non-deliverable forwards contracts (NDFs), considered the best available proxy for forward-looking market expectations of the yuan's value, traded at 6.719, or 2.04 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0402 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.5821 6.5795 -0.04% Spot yuan 6.5723 6.5855 0.20% Divergence from -0.15%

midpoint*

Spot change YTD 5.70% Spot change since 2005 25.93%

revaluation

Key indexes:

Item Current Previous Change Thomson 95.69 95.74 -0.1

Reuters/HKEX CNH index

Dollar index 93.394 93.278 0.1

*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 2 percent from official midpoint rate it sets each morning.

OFFSHORE CNH MARKET

Instrument Current Difference

from onshore

Offshore spot yuan 6.5678 0.07% * Offshore 6.719 -2.04%

non-deliverable forwards

**

*Premium for offshore spot over onshore

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

(Reporting by Winni Zhou and Brenda Goh; Editing by Richard Borsuk)