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China's yuan edges up on corp dollar sales, poised for best month since 1994

SHANGHAI, Jan 30 (Reuters) - China's yuan edged higher against the dollar, which was dragged down by corporate sales in Tuesday's morning session with the local currency on track for its best monthly performance in over two decades. The dollar's losses, however, were marginal. It traded above a recent three-year low against a basket of major currencies, supported by rising U.S. bond yields as traders awaited a Federal Reserve policy meeting for fresh catalysts. The recent rally in the yuan has pushed its year-to-date gain against the dollar to 2.7 percent, adding to its increase of around 6.8 percent in 2017 on the back of solid economic growth. According to Thomson Reuters data, the Chinese unit is on course for its biggest monthly gain since 1994, when market rates were unified. Prior to market opening on Tuesday, the People's Bank of China lowered its official yuan midpoint for the first time in over a week to 6.3312 per dollar, 45 pips or 0.07 percent weaker than the previous fix at 6.3267. In the spot market, the onshore yuan opened at 6.3356 per dollar and was changing hands at 6.3344 at midday, 116 pips firmer than the previous late session close. The spot yuan trade was sluggish, with trading volume at $4.366 billion as of midday. That was well below the normal half-day volume of around $15 billion. Traders said their corporate clients' dollar-selling increased in Tuesday morning trade after the greenback rose overnight, helping to prop up the yuan. The market has become more cautious in the past week after the rapid gains in the yuan, with some market participants saying expectations of seasonal dollar demand from households will put a cap on Chinese currency's rally. Demand from households for dollars usually surge ahead of the Lunar New Year holiday. The first day of Lunar New Year falls on Feb. 16 this year. The Thomson Reuters/HKEX Global CNH index, which tracks the offshore yuan against a basket of currencies on a daily basis, stood at 96.67, weaker than the previous day's 96.68. The global dollar index rose to 89.372 from the previous close of 89.308. The offshore yuan was trading 0.09 percent weaker than the onshore spot at 6.34 per dollar. 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 6.467, 2.10 percent weaker than the midpoint. One-year NDFs are settled against the midpoint, not the spot rate.

The yuan market at 0419 GMT:

ONSHORE SPOT:

Item Current Previous Change PBOC midpoint 6.3312 6.3267 -0.07% Spot yuan 6.3344 6.346 0.18% Divergence from 0.05%

midpoint*

Spot change YTD 2.72% Spot change since 2005 30.66%

revaluation

Key indexes:

Item Current Previous Change Thomson 96.67 96.68 0.0

Reuters/HKEX CNH index

Dollar index 89.372 89.308 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 6.34 -0.09% * Offshore 6.467 -2.10%

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 John Ruwitch; Editing by Shri Navaratnam)