SHANGHAI: Spot yuan firmed slightly against the dollar on Thursday as global currency markets remained becalmed by neutral U.S. economic data and a lack of other significant developments. The People's Bank of China (PBOC) set the yuan midpoint - against which spot prices are allowed to vary by 1 percent in either direction - at 6.3435 before the market open. Spot prices, however, remained in the shallow rut they have occupied all week, opening at 6.3530 against the dollar, a mere 13 pips away from Wednesday's close. Spot prices meandered on to close at 6.3496 in low trading volumes, traders said. "Volatility is relatively light, as it has been all week," said a trader at a joint-stock bank in Shanghai. As a result of a weakening trend in the fix that began Monday, combined with the range-bound immobility of the spot market, the spread between the two has also narrowed to less than 0.2 percent, the closest market- and regulator-determined prices have been since May. Throughout the spring and early summer, spot prices steadily moved away from the fix as traders said corporate customers grew increasingly bearish on the yuan and began unwinding short dollar positions. The central bank, however, continued to post stronger yuan fixings than the market wanted, causing the spot price to finally hit the width of the 1 percent trading band - which had been widened in April - in July. However, economic data showed that corporates also reached positions they felt comfortable with in August, and stopped hoarding dollars. Traders now say the spot market has reached a temporary equilibrium pending future macroeconomic developments. "I think the narrowing of the spread between the midpoint and the fixing is a trend, because the PBOC intends it that way," said the Shanghai trader. He said that he thinks in the future the central bank may modify the way it sets the midpoint, taking more consideration of closing spot prices the previous day, as opposed to fixing purely on overnight movements in the dollar index. In addition to watching the dollar index, traders are also paying attention to the euro, which has strengthened against the yuan in recent weeks, relieving Chinese exporters. OFFSHORE AND FORWARDS Forward contracts spreads continue to widen against the spot, indicating both anticipated future depreciation and improved expression of differing interest rates thanks to lubricated cross-border capital flows, traders said. The offshore 1-year non-deliverable yuan forward contract changed hands at 6.4495, while the onshore forward of the same tenor was priced at 6.4746 at the close of business. Volatilities for forwards and swaps contine to test new lows, indicating relative consensus about the future value of the currency. The 250-day moving average of the one-year dollar/yuan implied volatilities continues to decline to 3.2200 by the close on Thursday, the lowest it has been since December 2007. Offshore yuan spot prices (CNH) continued to track the onshore price.

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