In  the Past 7 Days Yuan Devalues Most In 20 Years
By Tyler Durden 2/25/2014 [edited]
 
The last 7 days have seen the end of the unstoppable 'sure-thing', the one-way bet-of-the-decade, – yes Durden is referring to the end of the appreciation of the Chinese Yuan. ince the currency has gained nearly 1%, the largest gain since 1994, suggests the Chinese Central Bank is intervening. 

As for the causes, there is clear evidence of intervention from the People's Bank of China. We think that the recent yuan move is intended to discourage arbitrage inflows. If short-term capital inflows abate, the depreciation will probably halt. 

The yuan appreciated by nearly 3% against the greenback and 7% against in nominal effective exchange rate terms in 2013. Over the same period, China's FX reserves added another $500bn, despite the repeated talk from officials that China has had enough reserves. These seemingly contradictory messages and signs, in our view, suggest that the PBoC never really wants too much yuan appreciation, especially if it is driven by short-term speculative capital inflows.

The recent divergence of Chinese RMB interest rates and off-shore RMB interest rates raise suspicion that the Chinese Central Bank is behind the move. As the Chinese Central Bank buys more USD, it creates natural liquidity in the CNY, leading to much lower interest rates. For the Chinese authorities, this intentional weakening seems to be aimed at trade – specifically exports (and maintained export growth).

But this certainly will not please the Japanese (trying to devalue and manufacture their own recovery) or any other beggar thy neighbor nation. Welcome to the Currency Wars China… Potential asset deflation is a risk, as the carry trades diminish/unwind.