The unusually sharp decline in the yuan in the recent days, which has caught many investors off guard, has given rise to speculation that a policy shift is taking place in the mainland.
The currency has depreciated 0.5 percent against the U.S. dollar over the past two weeks. It traded around 6.094 against the greenback on Monday, extending its worst weekly performance in more than two years, after the People’s Bank of China (PBoC) fixed the daily mid-point lower for a fifth straight session.
“Chinese officials have played down the drop in the CNY (traded onshore) and CNH (traded offshore) but nonetheless, markets are seeing it as a major shift in policy following recently weaker economic data,” said Mitul Kotecha, global head of currency strategy and global markets research for Asia at Crédit Agricole.
“By abruptly reversing the appreciation trend, there is a sense China wants to implement more two-way risk in the currency. They don’t want the market to see the currency as a one-way bet,” he said, noting that market positioning had become heavily long the currency. The yuan has attracted considerable foreign investor demand over recent years on its steady appreciation and relative stability.