Spot yuan finished at 6.3066, 112 pips stronger than Thursday's close. The People's Bank of China (PBOC) held to its recent pattern of linking its daily mid-point to the dollar index ahead of the forex reserve figures. After the dollar weakened slightly overnight, the central bank set a mid-point of 6.3201, marginally stronger than Thursday. The central bank appears to be relying on the dollar index as market consensus has emerged that two-way volatility in the yuan will become the norm this year. "In a situation where there are no clear expectations of appreciation, the link with international markets will grow stronger and stronger," said a trader at a major state-owned bank in Shanghai. With expectations of two-way volatility already firmly entrenched prior to the release of the new forex reserves data, market reaction was muted. With a narrowing trade surplus and evidence of moderate forex outflows already evident in previously released data, the new figures had little impact on market sentiment. Indeed, even after the $20.6 billion decline, the central bank is still sitting on $3.18 trillion in reserves, leaving them with more than enough ammunition to protect the value of the yuan against an acceleration of forex outflows. Though analysts believe short-term "hot money" outflows are contributing to the decline in forex reserves, hot money is likely only a small part of the story, they say. China's strict capital controls make it extremely difficult for investors to pull funds out of China quickly. Rather than hot money, the drop in foreign exchange reserves may be mainly due to the increasing use of the yuan for trade settlement, according to a recent research note by Ting Ly, chief economist at Bank of America Merrill Lynch. When the market expects yuan depreciation, as it did late last year, "foreign exporters will demand USD payment from Chinese importers, while foreign importers will pay RMB, if available, to Chinese exporters," Ting wrote. The result is imbalanced foreign exchange flows, as dollars flow out and yuan flow in. This imbalance may appear in the data as slower foreign exchange reserve accumulation -- or even net decline -- even as China continues to run both trade and investment surpluses. In the offshore non-deliverable market, one-year forwards traded at 6.3020 in afternoon trade, virtually unchanged from Thursday's close. The rate implied 0.3 percent appreciation over the next year. Offshore yuan traded at 6.3105, also flat. At the level, CNH was at a 0.06 percent discount to the onshore close.