China yuan
Yuan seen falling to new lows Reuters

The Chinese currency dropped to a 10-day low on Wednesday as the central bank has set a higher fixing rate against the US dollar increasing fears of fresh multi-year lows for the yuan soon.

The People's Bank of China (PBOC) set the midpoint rate at 6.5302, 0.04% weaker than the previous fix at 6.5273. The pair traded up to 6.5335 in the spot market.

The PBOC had been keeping the USD/CNY level below 6.58 before the Spring Festival early this month but a surprise fixing on the lower side took it to a low of 6.4894 on 15 February, translating to a 6-week high for the yuan.

With Wednesday's move, the Chinese currency is down nearly 0.7% from last week's levels and is on course to retest the January first week levels near 6.60, which was the yuan's weakest level since 2011.

Analysts expect a slowing economy and uncertainties surrounding the foreign exchange policy of the world's second largest economy weigh on yuan but adds that market sentiment has improved since January.

At the start of the year, hedge funds largely betting in favour of yuan slides in options markets but a Reuters survey of fund managers, currency traders and analysts last week showed bearish bets on the yuan have fallen to their lowest since late November.

China's forex reserves have dwindled $99.5bn last month to $3.23trn as the central bank sold dollars to defend the yuan. The reserves have shrunk by $762bn since mid-2014.

USD/CNY Monthly
New multi-year lows likely for yuan in case of a break of the January low. IBT/BM