China's central bank set the official midpoint reference for the yuan to $ 7.0326 per dollar on Tuesday, stronger than analysts expected, but weaker than the previous session.
It was the fourth session in a row where the People's Bank of China put the midpoint at a level weaker than the psychologically important 7-yuan-per-dollar mark.
Analysts predicted the midpoint to be set at 7.0421 per dollar after the yuan last traded at 7.0578 in Monday's session, according to Reuters estimates.
The yuan has become a rallying point among investors because of the ongoing US-China trade war, which escalated earlier this month when President Donald Trump said the United States imposes a 1
The PBOC allows the spot rate to trade at a range of 2% above or below today's official midpoint fixing, and this is known as land yuan. The less restrictive exchange rate used outside China is known as the offshore yuan. Investors usually look at the difference between the exchange rate on land and offshore to determine whether the Chinese central bank intentionally manipulates the yuan.
"Forget the psychologically important level (yuan) has entered a new era," wrote Tommy Xie, head of Great China Research at OCBC Bank, in a note Tuesday morning. Xie explained that the yuan is likely to move towards a cleaner floating system, where market forces will potentially make more sense about exchange rates.
"The latest observation shows that China's individual and companies have been more rational with less foreign currency hardening. This could create a window for China to test the new currency regime," he said, adding that currency volatility is likely to rise to absorb the external shock.
Still, that does not mean that China will allow the currency to flow freely, and that Beijing will not hesitate to intervene if the yuan deviates too much from the basic level, Xie explained.
The yuan depreciated over 7 per dollar last week for the first time since the global financial crisis of 2008, prompting the US Treasury Department to designate China as a currency manipulator. A weaker currency makes a country's exports cheaper and the Trump administration has consistently complained that a cheaper yuan will give China a trade advantage.
Since the end of July, the yuan on land weakened more than 2.5%, while the offshore rate fell 2.81%. On Tuesday, the yuan traded ashore at $ 7.0575, and the offshore yuan was 7.0946 from 10:04 hp / SIN.
"The recent sudden devaluation of (yuan) sounds like a deja vu and brings us to the August 2015 experience," wrote Alicia Garcia Herrero, Asia Pacific chief economist at Natixis, in a note dated August 12. in line with our view that there is no point in defending a psychological level during the prioritization of growth. "
Garcia Herrero said that given the risk of further tariffs from the US and China being termed a currency manipulator, the Chinese currency, also known as the Renminbi," is likely to face higher depreciation pressures and thus potential capital outflows. " "We believe that a large write-off will be avoided because it will push too much capital out of China and put further restrictions. about liquidity, and thereby growth, "Garcia Herrero said, adding to the onshore market volatility will be driven by a gradual change in daily mid-range fixing. In the offshore market," the liquidity pool is much smaller and several of China's central bills will be issued for to tie up liquidity to avoid speculation. "
Further weakening of the yuan will also depend on some of the moves coming out of Washington according to Alex Wolf, head of investment strategy in Asia at JP Morgan Private Bank. next month, there is likely to be more weakness in the Chinese currency, he told CNBC's "Squawk Box" on Tuesday.
"But I think we have to think about it, but as market-driven depreciation, not necessarily as a devaluation," he said. Wolf. "If you see all of China's goods to the United States falling below tariff, it makes sense that the Renminbi depreciates against the dollar."
He added that PBOC lets market forces push the yuan in a direction that It was otherwise going to move in anyway without intervening to artificially support the currency.
– Reuters and CNBC's John Schoen contributed to this report.