Yuan enters new era with freer float

"The yuan has gone from being a most attractive carry trade bet in emerging markets to the worst in two months as the central bank's efforts to weaken the currency has caused volatility to surge," Geoffrey Kendrick, head of Asian currency and rates strategy at Morgan Stanley, said at a news conference last month.

"Implied volatility in the currency rose in February by the most since May, when the Fed first signaled plans to cut stimulus."

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Shen Jianguang, Hong Kong-based chief economist with Mizuho Securities Asia Ltd, wrote in a commentary on Tuesday that the yuan has entered into a "new era of two-way fluctuation".

Room for appreciation is "very limited", he wrote, given that China's trade surplus has been shrinking, labor costs are rising, and it has already strengthened by more than 40 percent against the dollar since 2005.

Room for depreciation is limited, too, as the direction for fund flow is still inbound, and China's economic growth is still one of the world's fastest despite its recent deceleration.

"Two-way fluctuation against the US dollar will happen more frequently and in a bigger range this year, while the yuan will remain basically stable against a basket of currencies," Shen said.

Bank of China Ltd said in a report that the yuan's recent decline will be short-lived and that China's trade surplus and huge foreign exchange reserve will support the currency's long-term appreciation.

Nathan Chow, a Hong Kong-based economist with DBS Bank Ltd, said that the recent yuan weakness and narrower onshore-offshore yuan spread are unlikely to reverse the currency's increasing global role in trade finance activities

"A more flexible and volatile yuan exchange rate is likely to give rise to more genuine participation and less speculation in such activities," he wrote. "The longer-term growth in yuan trade finance will be motivated more by companies seeking cost advantages and a desire to mitigate foreign exchange risks."

On Tuesday, the yuan jumped on expectation that recent economic weakness will prompt Beijing to stimulate growth.

The yuan opened at 6.1828 per dollar, 131 basis points higher than Monday's close of 6.1959, amid a 26-basis-point increase in the daily reference rate to 6.1426.

The jump came as the flash manufacturing Purchasing Managers' Index, issued by HSBC Holdings Plc, fell to 48.1 in March, its lowest level since July 2013. The PMI was down from February's final reading of 48.5 and 49.5 in January. It disappointed analysts who expected a modest pickup.

Signs of a slowdown in China's economic growth were also factors in the yuan's previous weakening. A report released earlier in March revealed that Chinese exports declined by more than 18 percent in February from a year earlier, compared with a 10.6 percent increase in January, and a market expectation of a 6.8 percent increase.

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