China's Yuan Holds Steady in Light Lunar New Year Trade

YUAN CHINA - SHANGHAI, Feb 9 (Reuters) - China's yuan held steady against a broadly firmer dollar in holiday-thinned trading on Friday, with a persistently firmer-than-expected official midpoint guidance fix supporting the local currency.    

The yuan swung in an extremely tight range, while trading volume contracted to $3.9 billion from a normal half-day volume of about $15 billion. 

Activity was very subdued on the last trading day before the Lunar New Year break, dealers said, as a vast majority of market participants have already gone on holidays. 

The traditional festival will start from Feb. 10, with the markets reopening on Feb. 19.

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Prior to the market opening, the People's Bank of China (PBOC) set the midpoint rate , around which the yuan is allowed to trade in a 2% band, at 7.1036 per dollar, 27 pips firmer than the previous fix of 7.1063.

The central bank continued its months-long practice of setting the official guidance at levels that are firmer than market projections, widely seen by traders as an attempt to keep the currency stable.

Friday's midpoint was 960 pips firmer than a Reuters estimate of 7.1996. 

In the spot market, the onshore yuan opened at 7.1910 per dollar and was changing hands at 7.1973 at midday, 3 pips softer than the previous late session close.

Traders said the central bank has been bolstering market sentiment heading into the holidays by way of stronger midpoint fixings. 

"We think USD/CNY will continue to trade in a fairly narrow range around our 3-month forecast of 7.15, but fading January seasonality and resilient USD strength point to upside risks for USD/CNY," analysts at Goldman Sachs said in a client note this week.

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Traders and analysts said the market focus would next turn to the PBOC's medium-term policy loan rollover on Feb. 18 to gauge the official monetary stance.

A Reuters poll tips the central bank to stand pat on the key policy rate, as the authorities appear to be keen to maintain currency stability.

Separately, the PBOC said on Thursday that it would keep policy flexible to boost domestic demand, while maintaining price stability. Markets expect more policy support measures in coming months to shore up China's patchy economic recovery and tamp down on rising deflationary risks.

By midday, the global dollar index <.DXY> rose to 104.17 from the previous close of 104.165, while the offshore yuan was trading at 7.2109 per dollar.